How Do Taxes Work When You Live Abroad?

11 June 2019

This post offers a general overview of how taxes work when you are living abroad.

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Living abroad as an expat, a digital nomad, a pensioner, or however you describe yourself, has its perks. But along with the nice sunny weather and lower cost of living comes a few complications, and one of the most daunting is taxes. This post offers a general overview of how taxes work when you are living abroad.

How do taxes work when you live abroad?

The first thing you need to know about taxes when living abroad is that the rules vary widely depending on the country, your home country, and whether or not you are a fiscal resident in the new country. Some countries, like Spain, have different taxation schemes for people who spend less than half the year here, but this is not necessarily the case everywhere. Certain countries have mutual agreements between them to avoid double taxation on expats’ income, but in other cases no such agreement exists.

Additionally, your home country may or may not require you to file taxes there irrespective of your residency status in another country, even if the income was earned in the new country. For example, citizens and permanent residents of the United States who are living in the European Union often make the mistake of thinking they don’t have to file a US tax return because they are resident in Spain and only earned income in Spain. American expats are actually still required to report this foreign income to the IRS. In the case of Spain, there is no double taxation agreement per se, but you do have a tax-free exemption in the US on foreign-earned income up to about $100,000. This is known as the Foreign Earned Income Exclusion. You can also get a tax credit that reduces your US taxes based on taxes you have paid to a foreign government.

Because of these complexities, it is highly advisable to hire a lawyer or tax professional who is familiar with the tax structure in your current country and your country of origin.

Taxes living abroad for residents and nonresidents

First of all, how do you know if you are a resident or not? It depends on the country, but in EU member states, including Spain, you are considered resident for tax purposes if you spend 183 days or more out of the year in that country. In countries which use different tax schemes for fiscal residents and nonresidents, the former often benefit from tax breaks that are not available to nonresidents.

Taxes living abroad in Spain for residents are done on a progressive scale, with five tax rates from 19% to 45% on personal earned income. There is a tax-free allowance for individuals of €5,500, or more for elderly people or people with dependents. Other deductions are also available to reduce the income used as the tax base. After registering with the tax authority using Modelo 30, residents will file taxes in Spain using Modelo 100, plus additional forms as necessary depending on the types of income, deductions, etc.

On the other hand, in Spain, taxes for those living abroad as nonresidents are done with a flat rate of 24%. This rate may be advantageous to people earning a high income, since they would pay 45% on income over €60,000. However, nonresidents are not able to take a tax-free allowance for themselves or any dependents and are not going to be eligible for deductions that reduce your taxable income. Nonresidents need to register with the tax authority using Modelo 149 and then declare income earned in Spain using Modelo 150. Remember that, as a nonresident, if you own real estate in Spain, you will be taxed on rental income you earn from that property or from its imputed income if you are not actually renting it out.