What is a personal allowance for Spanish Taxes

A "personal allowance" is your tax-free income provision. As you say, it's a deduction against your taxable income. If your gross taxable income is at, or lower than, the allowance it would be tax-free. If your gross taxable income is over the threshold, you deduct the allowance to get your net taxable income.

But tax affairs for American citizens are usually a little complex, as they will often be tax resident in two countries (USA by citizenship, and Spain by residence). It's probably worth finding a tax specialist with experience of US citizens and their dual filings to advise you.

I have been told by a Spanish tax advisor and read it (in one place) on another forum that the personal allowance is an amount (say €6700) that is multiplied by your tax bracket (say 19%):  (€6700 x .19 = €1273) and that €1273 is subtracted from your taxes not your income.  (And it wasn't really easy to understand the tax advisor's explanation... fortunately I now have a Spanish tax advisor and can ask them over and over again to get it right)

There seems to be many explanations of how this is applied.

I agree with you.  I will need a tax advisor to navigate my way through both the Spanish tax system and the U.S. with respect to the rules within each and the double taxation treaty.

I appreciate your advice.

Thank you

@chasleslieb

Well, I think, mathematically, that's the same! In other words:

(gross income - personal allowance) x tax rate is the same as (gross income x tax rate) - (personal allowance x tax rate)

Using gross of 26,700 and tax rate of 20% (for easier maths)

(26,700 - 6,700) x 0.20 = 20,000 x 0.20 = 4,000 and (26,700 x 0.20) - (6,700 x 0.20) = 5,340 - 1,340 = 4,000

However, the former is the way that most folks explain it, and it's easier to understand (and calculate). And you often don't know your tax rate until you calculate your net income. Indeed, many countries, including Spain, have banded tax rates, which means you can pay multiple tax rates for multiple chunks of your income.

So if your gross income is, for example, 126,700 euros your net taxable income is 120,000.

The tax rates applicable are 19% up to 6,000 (i.e. up to 12,700 of gross income) or 6,000 x 0.19 = 1,140 euros

and 21% for 6k to 50k (i.e. up to 56,700 of gross income) or 44,000 x 0.21 = 9,240 euros

and 23% for 50k to 200k (i.e. up to 206,700 of gross income) or 70,000 x 0.23 = 16,100 euros

Your chunks are 6,700 + 6,000 + 44,000 + 70,000 = 126,700 your gross income. And the tax paid on each chunk is 0 (personal allowance) + 1,140 + 9,240 + 16,100 = 26,480 euros.

The effective tax rate is therefore 26,480/126,700 = 20.9%

Some tax info here:

https://taxsummaries.pwc.com/spain/individual/taxes-on-personal-income

Thank you so much for this information.

This is the first time I have heard of a tiered tax assessment.

I am confused a bit:

From the table below Personal Income Tax (PIT) rates (on the site you shared) I see

Up to €12,450: 19%

€12,450–€20,200: 24%

€20,200–€35,200: 30%

€35,200–€60,000: 37%

€60,000–€300,000: 45%

More than €300,000: 47%

Income tax on savings is levied at the following rates:

19% for the first €6,000 of taxable savings income

21% for the following €6,000–€50,000

23% for the following €50,000–€200,000

26% for any savings income even more than €200,000"

I am confused as to where an IRA income and pension income come into play.  Are they "savings" or are they taxed at the higher rate?

I see two different tax rates for €35,000:  37%  and 21% .  Maybe you could assist me in clarifying the difference... (please)

Now that I understand the idea behind a tiered tax rate, I see how one gets the same tax whether it is subtracted from income or taxes.  I guess it is the manner in which it is submitted on the tax form. Thank you very much for your help and for your demonstration with the numbers.

@chasleslieb

Oh, well spotted... I was trying to give you a worked example of "progressive" or banded taxation to illustrate how it works. But, yes, I grabbed the first table I saw which said "personal income tax rates".

So it was my error in picking this table, as you are quite right that it specifies this is for "savings taxable income" rather than "general taxable income".

I was not even aware that Spain had this distinction. But it seems it does. And you're quite right that there are higher tax rates applicable for general taxable income. The PWC guidance even says that the general rates depend on where you live in Spain too, as another complication. :-) So 21% is savings taxable income, and 37% is general taxable income.

I'd have guessed that pensions/IRA come under savings taxable income, but this is where specialist advice would be necessary. Plus, the DTA between USA & Spain would come into play here, as I'd guess there are some pension exemptions (so a foreign source pension would not be included as either general taxable income or savings taxable income).

For extra complications, not only does Spain have different income taxes for your general income and your savings income... but it also has a wealth tax based on your total assets/savings. Again, I'm not a specialist, so I don't know exactly what's included in one's taxable wealth, and whether the DTA excludes anything.

@chasleslieb

To me, it all sounds a bit complicated, I'd be happier with a bit of professional advice.

While it's a bit intimidating when first looking at a new tax system, I suspect that, in practice, it's not such a big deal. Americans have to submit a US tax return annually anyway, so you've worked out all the numbers. Then doing a separate return for any extra due to Spain is probably not very much work.

For many American retirees, they have a pretty simple situation with some savings and a nice pension. I've heard many pensions are tax-exempt under the DTA. And then, say, you keep some of your savings in a bank account (very little interest, but some), and some in a brokerage account (with some dividend income), and some goes to buy a villa near a nice beach on the Mediterranean. :-) So the pension is (probably) tax-free because of the DTA. The savings taxable income is (probably) the interest and dividends. They don't have any general taxable income. And the wealth tax is (probably) based on house value + savings + brokerage balance.

I have seen a number of Americans posting on this forum, and it seems that it works perfectly fine for most of them, especially with a bit of professional help. However, a few have also decided to avoid the problem by keeping their stays in Spain under the 183 days limit (the "substantial presence test", although Spain does have a couple of other tests, so care is needed). It probably seems attractive as you avoid being a tax resident in both countries... but now you have to keep a house in both USA (very expensive) and Spain, and keep health insurance in both USA (very expensive) and Spain. Not to mention frequent travel, multiple vehicles, and so on.

I really appreciate your contribution on this issue and your help.

I have been advised that a pension from PUBLIC sources i.e. government (state, city, federal in the U.S.) is tax exempt in Spain.

I'm going to defer the IRA income, non-public pension, and social security income to a tax advisor in Spain and another advisor in the U.S. to determine how the tax treaty is applied.  I have an added complexity in that my IRA (which was a 401A---NOT 401K) originally came from PUBLIC source but got rolled into PRIVATE company after retirement so it is unknown at this time whether Spain recognizes it as a PUBLIC IRA or a PRIVATE IRA.  The tax advisor is researching this and a lawyer has offered to research it for about €1500 Euros or more.  (I'm going with the advisor first)

I was also advised to file married jointly rather than separate as it will reduce the income value per person and put us in a lower tax bracket.

I don't have a huge income.  I won't be buying a villa nor can I afford to play the tax resident hide and seek game.  Besides, I hate flying and Spain is going to be my home.  We just need a small place that's quiet and peaceful.

Thanks again

Not being wealthy, we don't have to worry about the wealth tax.  We are well below that threshold :^)

This is from Blevins Franks:

Another explanation to help:

"The basic personal allowance for 2011 is ?5,151 per person. For joint returns the allowance for the second spouse is ?3,400. These are unchanged from previous years. This is less generous than it first appears as it is not given as a deduction from income but as a tax credit at the lowest rate of tax and then deducted from your tax bill. An individual?s tax credit is therefore worth ?1,236 (?5,151 x 24%) or, if your only income is investment income, ?978.69 (?5,151 x 19%)."

@gwynj You seem knowledgeable so I'd like to address one part of your comment.

I became a Spanish citizen 5 years ago, and have a DNI.

However, I have never spent a year of 183 days in the country, nor have any financial interests, or family in Spain. All my interests and taxes are paid in the US.

I have never filed a Spanish tax return. Am I taking any risks? I have read, that I should still file a 720 form. But all the people,

Spanish friends, said not to, because you don't want to get into the 'tax system'.

What do you think or know?

Thanks Much

Robert

@bocheball

I don't know much, actually... although I have an opinion on many things. :-)

You're correct that the main test Spain (and most countries) use is the "substantial presence" test, and you spend 183 days or more in Spain (in a year).

But Spain does have other tests: your wife/children is/are living in Spain, and/or your "center of economic activity" is in Spain.

https://taxsummaries.pwc.com/spain/individual/residence

Unlike USA, Spain doesn't treat its citizens as automatically tax resident.

Based on what you've said, you would appear to be a Spanish citizen, but not a Spanish tax resident (as you don't meet the above tests).

And I guess your friends are probably correct that it's "better to let sleeping dogs lie".

For a definitive answer, you maybe should have a consultation with a specialist Spanish tax accountant/attorney.

Thanks for responding.

I have spoken to tax lawyers and get varying answers.

@bocheball

That's interesting! On what basis/justification do the "yes, 720" professionals say it's necessary?

They think there's another test (e.g. citizenship) which makes you tax resident in Spain? Or they think that the 720 is a "declaration of overseas assets" which must be filled by all residents (not just tax residents)?

It seems plausible that Spanish citizens are required to file a 720, and you are now a citizen. It might also be that there's a catch in the qualification for citizenship (whereby you are supposed to spend a certain qualifying time of "continuous residence" in Spain. That period of continuous residence is probably more than 183 days! Putting you in the awkward position of either acquiring citizenship under false pretenses, or you acquired tax residence by spending sufficient time in Spain to qualify for citizenship.

I suppose there's also the possibility that the distinction between gaining and losing tax residence is unclear. After all, American don't need to consider this at all, unless they relinquish their citizenship. So the tests discussed above, apply in deciding if you BECOME a tax resident. But if, in subsequent years, those tests would not apply, that does NOT make you NOT tax resident. That's because there are different rules governing how you lose tax residence, once it has been acquired. (In other words, typically it's harder to lose it than to gain it, as you'd expect.)

At the very least, it would be wise to make sure that the professionals who said "no, 720" put their advice in writing, so you can wave these letters around if the tax boys and girls ever come a-knockin' on your door. :-)

I went to Agencia Tributaria and got lost without any definitive answer and a few dead ends (page error 404).  What I do see in a lot of tax service adds and google, is that the tax resident is the one who is required to file.  But this is just hearsay as it seems answers from legal sources are unreliable as well.  So maybe the fundamental test is: are you a tax resident?... yes or no.  If not, then you wouldn´t need to file the 720 because you don't pay taxes in Spain.  But you might be required by the IRS to report foreign bank holdings in Spain...called an FBAR which is electronically filed and seems pretty straightforward... you may already be doing this.

I am not going to single out the Spanish tax bureaucracy as being difficult to get a clear and definite answer in a timely manner.  The U.S. Social Security system and IRS are are also intentionally complex, obscure, and confusing.  I think it is the nature of governments.  Also website construction and management is very poor as private enterprise pays more for talent. (end of irrelevant ranting)

Bottom line... I´m really of no help... I will be a tax resident and will be filing my 720 form so I am in a different situation.  I also have a gray area question regarding public funding of an IRA... it remains gray.

With respect to gray areas... I once filed my U.S. taxes and the accountant told me I couldn't do it that way but I personally interpreted it differently, filed it as I saw it, and it was accepted.  Remember the caveat: "It's okay to avoid taxes... it's just not okay to evade them".  Sometimes things are so complicated nobody knows what's going on.

I agree that it wouldn't hurt to have a piece of official looking paper that said "NO" to give you peace of mind.

Good Luck!