A Spanish state pension is funded through social security contributions for everyone. The current age for retirement eligibility is set at 65. However, it is expected that the age limit might increase to 67 by the year 2027.
Expatriates residing in Spain must have a minimum of 37 years and 9 months of contributions to social security to qualify as a retiree. The program also applies to US citizens under the same conditions.
There are still private pension plans available for US citizens to retire in Spain. However, the pension payouts are subject to taxation. There might be some tax-efficient options, but it is essential to do market research before jumping to a conclusion on which plan to choose.
Therefore, it bears a huge significance to choose the most convenient retirement plan. By doing so, you would be ensuring financial security to retire as a foreigner taxed in Spain.
Here’s your tax guide for Americans in Spain.
Who Are Considered Tax Residents in Spain?
Mainly foreigners are considered to be tax residents if they spend more than 183 days in a year within the Spanish territory. This also affects pensioners who reside in Spain with a non-lucrative visa. There are few Spanish taxes for non-residents and resident foreigners.
In this case, the frequency of the visits to Spain can be consecutive days, or separate travel occasions from time to time.
Plus, foreigners who participate in or are involved in economic activities within the country, even as a pensioner, are also obliged to pay expat taxes in Spain for their income.
Foreigners who meet one of the criteria below have to file a tax return in Spain;
• Being employed and having €22,000 annual income,
• Gaining income from multiple sources,
• Acquiring rental income,
• Owning a property,
• Owning a business that operates in Spain,
• Receiving more than €1,600 in yearly dividends, interest, or capital gains in a single year
Taxation for American Pensioners in Spain
Americans living in Spain and retiring there are considered tax residents. This is mainly because their pensions are taxed as employment income. Due to their permanent residence, Americans retiring in Spain are subject to Spanish taxation on their income.
However, if these individuals receive pensions from a US source, some additional tax incumbencies may occur. But thanks to the convention between Spain and the United States, US retirees can avoid double taxation. Due to the convention; the taxable income based on American citizenship criteria may be deemed earned in Spain to eliminate the double tax of the pensioners.
Pensions paid by private entities in the United States are subject to Spanish taxation, regardless of whether it is related to prior employment or not.
On the other hand, when it comes to pensions provided by the Social Security System of the United States, the Tax Treaty suggests that they might be subject to U.S. taxation. In Spain, these pensions are also taxed as employment income under the Personal Income Tax Act.
In the case of pensions provided by the Social Security system of the United States, Spain is obligated to eliminate the potential double taxation issue. Taxpayers must report their U.S. Social Security benefits in their annual tax returns in Spain so that they can offset the tax paid to the United States against their tax liability in Spain.
There might be additional taxes foreigners are obliged to pay, these include Americans too. For example, if a US citizen pensioner owns real estate, there will be additional taxes regarding the asset. These could be annual property tax, or capital gains tax. You can take a look at property taxes on our “Costs to Maintain a House” page.
Personal Income Tax (IRPF) and Its Exemption for Americans in Spain
The IRPF stands for Impuesto sobre la Renta de las Personas Físicas. In some instances, pensioners can be exempted from paying taxes for their monthly income from social security. There are two critical factors to take into account: the yearly income amount and whether it originates from a single source or multiple sources.
If the sole income source is a pension that equals less than €22,000 per year, pensioners are not required to submit an income tax return. This means they would be tax-exempted.
As for private pensions exceeding the annual limit of €22,000 and obtained from a single source, foreign retirees will be obligated to file a Personal Income Tax Return for that year.
When there is more than one source of income alongside the pension payments, retirees are also obliged to pay taxes for their earnings. If the combined income exceeds €12,000 per year, foreign pensioners must file an income tax return.
Income Tax Rates for US Citizen Pensioners in Spain
The income tax rates follow a progressive structure since they rise in line with the taxable income. In general, the tax rates can span from 19% to as high as 47% for higher income brackets. It can change over time, so it's essential to know the specific rates applicable to the retiree’s region of residence.
On certain occasions, there might be several deductions or regulations that aim to ease the tax payments for foreigners. These could help retirees to pay a lower tax amount for their regular income. Since the reduction conditions may differ, it is always suggested to work with a professional tax advisor.
Double Taxation in Spain for American Retirees
The US has a tax treaty agreement with Spain, making it easy to avoid double taxation issues.
In certain cases, foreigners may face double taxation for the income they obtain from abroad and within Spanish territory. In these situations, it is quite beneficial that there is a tax treaty agreement between Spain and the United States. Thanks to the mutual agreement between both countries, the tax treaty often solves disputes or issues related to double taxation. With tax treaty solutions, governments aim to lighten the tax burden on the shoulders of US expats and pensioners living in Spain.
Income sources are the main taxable when the individual is a resident in a foreign country. So, the treaty is mainly applicable to tax residents in Spain. Short-term visitors do not need to look for a tax treaty or fill in tax returns.
When a foreign retiree faces a double taxation issue, the Spanish government will be the resident country to facilitate resolution. It is typically made via deduction or exemption.
Are You Considering Retiring in Spain?
Spain is a heavenly paradise, especially for foreign retirees. From a healthy environment to a sunny climate, Spain’s stunning Costa’s have everything you are looking for. There are countless Americans moving to Spain to live their best retirement lives.
Take a look at our blog page, read our articles about retirement in Spain, and contact us today to start your new life ahead in the beautiful Mediterranean destination!