Taxes in retirement for Americans

hi there,
I'm planing to retire in Spain (around Barcelona) but the main concern are taxes. I did online research but found incomplete or confusing information about taxation in retirement. Here is my info:
I'm US and also Slovakia-EU citizen and my wife only US citizen living now in US. We have US retirement accounts 401k, IRA, Roth IRA and also regular investment account with stocks. Later we will receive government social security payments. My questions would be:

1. I'm planning to use maybe $50-70k a year to live and travel in Spain. I would draw that money from US investment account first and then 401k, IRA and later social security payments. On all of these accounts I have to pay taxes to US (accept Roth IRA) but does Spain will tax me on any of above retirement accouts? Spain taxes on 50-60k would be high 45%, in US I would only pay maybe 15% after deductions. OR are foreign retirement accounts exempt from tax? Paying 45% versus 15% looks too high.

2. I will sell my house and keep the proceeds in checking or investment account in US, tax free in US. Any tax consequences from that money in Spain after the sale? Assets reporting? I would sell house before I move to Spain and just invest it in stocks.

3. As EU citizen I don't need visa but my wife needs probably non-lucrative visa. Since I don't live or work in EU, I do not have now any health insurance in EU, I have just EU passport. What health insurance am I eligibe in Spain OR do I have to buy and at what cost, approximately for person in 50y+ old?

4. We plan to live permanently in Spain. What residency is the best for tax purposes in above scenario, me as EU+US citizen and wife as US citizen, both not working? We also have 1 child 9y old but that probably does not matter?

Thank you for all your info!
Eric

I'm interested in this topic as well.  From what i understand, Spain taxes worldwide income.  Are the distributions from US social security, 401k considered income.  The US taxes them after all.  Will Spain tax these?

Regarding Spanish wealth tax, will that cover all of ones retirement savings from 401k, IRA?

How does the double taxation treaty between the US and Spain eliminate or reduce the tax burden for retirees?

And what about the inheritance tax?  Anyone has any experience with this?

@Erichsisol - When considering a region, if you are concerned with taxes, consider the implication of wealth and inheritance taxes.  These, apparently, are set per autonomous region.  Below are 2 articles that you may find useful.

Inheritance Tax - See section on "How is the regulation of the Inheritance Tax in the different regions of Spain?"

[url=https://www.blevinsfranks.com/news/articles/spain-wealth-tax-rates-and-allowances[/url]- See section on "Wealth tax rates and allowances in Spain"

I still cannot find any blogs on how the double taxation treaty is applied to distributions to social security, 401k, and IRA.  I suspect though that Spain will tax them as income but possibly allow the deduction tax paid to the US.  In other words, if your tax bracket in Spain is 30%, then you will pay an aggregate of 30% in the end.  I cannot find any information that references any allowance.  Double taxation treaty does not imply that the other state cannot tax your income.  Take the case of US expats.  They still have to pay the US any income above $110 USD (minus some deductions).

I suspect 401k and IRA will be considered investment accounts.  I've contacted a 2nd lawyer today.  The first one didn't reply.

Thank you dennislg! I'm still very curious about all US expats from US living in Spain who retired. If Social security + 401k + IRA are taxed in Spain that would be a big burden.
1/ Let's say me and my wife will be taking total 50k USD a year from above retirement accounts to live in Spain and support son's college. In US we have automatic tax deduction of 24k and the leftover income 26k would be taxed very little, perhaps 15% since for US this is kind of low income. On the other hand if Spain will tax me on 50k retirement income then I might pay about 40% in taxes?? I'm wondering if US retirees really pay that much in Spain from retirement accounts? That would deter me from moving to Spain.

2/ Another topic would be Roth IRA account, which is tax free in US in retirement. How about Spain?

3/ Lastly regular investment accounts which have capital gains and dividends. Would that be considered 'earned' income and taxed in Spain OR otherwise?
In US if I live in low tax bracket under $80k USD per couple then my long term capital gains tax is 0% and dividends same as income (my case 15%). If taxed in Spain, they have no idea what is my cost basis so I can report no gains? US investment accounts report cost basis only to IRS but not overseas I guess?

I fully understand if I earn any income or work in Spain which would be taxed by Spain tax rates. But this is passive retirement income and not earned, like savings.

Any info will be much appreciated!
Erich

I am also wondering about this topic. From what I read, I was under the impression we do not have to file anything or pay taxes in Spain, but I am now beginning to wonder if that is correct. Does anyone know of a tax lawyer or accountant in the Barcelona area who is experienced in dealing with Ex-pat Americans? There are a lot of British people here, and the rules for them are different (at least for now - once Brexit goes through it may change).

Lots of questions. I recommend consulting with one of the online companies that do international taxes. From my own situation, I know the following:
1) Both Spain and the US tax all international earnings. Tax treaties are set up so that one is not double taxed. The county that you live in is your tax home, for me that is Spain,  and that affects how you do your returns.
2) Your taxes depend upon where your earnings come from.  My wife is Spanish, but has permanent residency in the US (green card). Both of us are required to file in both countries. All of her income is from Spanish sources (work).  She files and pays taxes in Spain and files in the US with a foreign income exclusion (and pays no US taxes).
3) Because Spanish tax laws do not give much of a break to married couples  and because my wife and I have similar incomes, our Spanish accountant has us file separately in Spain, so that we both fall in lower income categories.
4) At present, my income is all derived from a private retirement, a benefit of my US employer. According to the Spanish tax treaty BOE, my tax home being Spain, all taxes from my private pension are paid to Spain, and I am taxed here on my yearly income converted to Euros (as established by Spanish hacienda). My income of about $34,000/yr is taxed at around 20%, I think. I declare these taxes on my 1040 as well as other small amounts of income and the US refunds most or all of my withheld taxes.
5) I have held off on collecting Social Security  but will begin collecting next year. According to the Spanish BOE, my taxes from income from social security will be paid to the US. I assume that I will move to a higher tax bracket in both countries next year.
6) I do not know which if any deductions are applied to my Spanish taxes. My wife and I have a 22 year old son.
6) I recommend using an international/online firm to do the US taxes. It is a lot of work to figure it out yourself. Spanish accountants are very reasonable. I pay around 100 Euros for my simple return, and can do the return online and submit it.

When you said "private retirement", are you referring to 401k and IRA? 

When you said "income" from this private retirement, are you referring to the distribution or withdrawals from the 401k and IRA?  Is it correct to assume that dividends and interest income generated within the 401k are not taxable until they are withdrawn from the retirement account?

Spain has a wealth tax.  Are 401k and IRA included in the calculation of the wealth tax?

I have a private pension from a company in the US.  Don't know the answer to the other questions, but I assume that interest and income are not taxable until retired from 401K and IRAs as per US law. Here is the Spanish BOE and explanation, but it is in Spanish. There is also a simplified explanation on the web somewhere. I couldn´t find my copy.

https://www.boe.es/buscar/doc.php?id=BOE-A-1990-30940

I have a photocopy of the original, BOE núm. 306, sábado, 22 diciembre 1990, pg. 38256. The simplified interpretation states plainly that taxes on state pension (soc. sec.) are paid to the state paying the pension. Taxes on private pensions go to Spain. I would assume IRAs and 401ks are private. For my private pension I pay all taxes to Spain.

Carl

I attended a webinar on US/Spain Taxes for Expats today. 

1) 401k and IRA assets are included in the calculation of the wealth tax.  Each region has their own allowance which may or may not affect your tax burden.  Per my previous research, Madrid has the best with a 99% allowance.

2)  Double tax treaty is not straight forward.  Someone has to invoke Article 10 and that has to be accepted.  But you'll have to pay the tax you owe each country and file for a refund from one of them after.

3) They explained the difference between how the US and Spain taxes.  The US taxes based on citizenship while Spain is based on residency.  So, for US citizens, you will have to pay the US no matter where you are.  For Spain, you only pay Spanish taxes if you reside in Spain.

I can't remember if social security benefits will be taxed by Spain.  They recorded the webinar.  If they make those recordings public, I'll post the link.

I'm super confused.  I've read, and read, and read.  I see a lot of tax information about "expats" moving to/living in Spain, but not a lot of tax info about expats who are drawing a government pension check.

I'm retired.  I receive a government defined benefit pension from a municipality (city firefighter). Pretty good size monthly benefit.  We are interested in relocating to Spain.  Will we have to pay income tax to US and Spain????  I don't understand treaty dealing with double taxation.

Will I be responsible for paying the US taxes only?  Do I pay the US, then calculate the Spanish income taxes, and pay the difference to Spain (on top of my US taxes)?  Or, will my government pension be exempt from Spanish income taxes as long as I file and pay taxes to the US? 

Help!  Thank you.

I’m facing a similar situation and have concluded that there is a tax liability in Spain for US citizens classified as “tax residents”, and It is complicated..

Since the US tax code itself is quite complicated, and not withstanding any tax treaties between US and Spain, I have opted not to pursue residency in Spain.

What's clear is that you will have to file tax returns to both US and Spain.  Since residents of Spain are taxed on worldwide income which include pension distributions, Spain may want you to pay the taxes to them.  If that happens, you can declare the tax you paid Spain as a deduction to your US tax return.  This is more likely because normally you pay your country of residence. But best to consult with a tax consultant.

Can the current expats share their experience on this?

I read with interest your note that investments held in IRA’s and 410k’s count as assets for the wealth tax. This in-depth article states otherwise:

“In order for us to consider a foreign financial product as a pension plan and not have to declare it in 720, the following requirements must be met:
1. That the contributions are unavailable until a contingency covered by the plan or pension product occurs.
• The contingencies covered can only be: retirement, survival, widowhood, orphanhood or disability.
• That once the contingency has occurred it has not been redeemed (once it is redeemed, the income or capital redeemed must be declared)

Examples:
401 (K) plans in the United States are pension plans: they do NOT have to be declared. Nor, the “deductible IRA” (Individual Retirement Account).

The consensus seems to be that Traditional IRA and 401ks qualify under these assumptions (although technically IRAs and 401ks can be redeemed with a tax penalty, this gets glossed over).”

https://htj.tax/2020/10/tax-residents-i … om-the-us/

Thank you very much for good info!

Well, that is a goodly budget for living in Spain. Even with taxes you should have a very comfortable retirement. :-)

I am not an expert on Spanish tax, and this sounds complicated enough that you probably should see a tax specialist before becoming a Spanish tax resident (by spending more than 183 days here). As an EU national, it might be worth considering giving up your US citizenship too, as that obligates you to pay US taxes, even if you've retired to sunny Spain and never return.

I do know that there is a double taxation treaty between the two, so that's a plus. It's a generalization, but I'd say that, in most cases, US taxes are lower than the Spanish taxes. So that means, effectively, that you'd pay USA first, then pay the difference (because of the double taxation agreement) to Spain. That means that giving up the US citizenship wouldn't matter - but I'd be surprised if that really turns out to be the case. (At the very least, you'd save the faff of two tax returns and expensive accounting advice.)

Some folks get confused between "legal residence" and "tax residence". The former is going through the immigration formalities and getting your residence permit (or EU citizen registration certificate in your case). Sometimes this does result in tax residence too, but in most countries (including Spain, I believe) it doesn't, and so is based on your physical presence (over 183 days per year), or perhaps your "center of economic interests" (where most of your wealth/economic activity is). As a legal resident you can come and go to your Spanish home and stay as little/long as you like. But to avoid the tax residence you'll need to count your days.

Avoiding the 183 threshold might be a hassle if you keep flying back to high-cost USA, but you could easily have another residence in a low-tax EU country (Ireland, Bulgaria, Cyprus). It's fine to have multiple legal residences (I have mine in Bulgaria, Cyprus, Spain).

The easy ones:

(2) Your house sale occurs before you become a Spanish tax resident. So taxes on the sale itself are a US-only issue. But I believe there is a "wealth tax" in Spain, based on your assets (in Spain if not yet tax resident, worldwide if a tax resident). It's not very high, but if it's a $5m waterfront pad in Sausalito, then it all adds up. If the funds generate interest then that's part of your taxable income too.

(3) Indeed, lucky you, you don't need a visa! :-) EU passport holders can relocate to any EU country with minimum formalities. The registration process requires proof of funds (ideally Spanish bank account with a few thousand euros), proof of Spanish address (a property you've purchased, or a long term rental contract), and proof of health insurance. Health insurance gets expensive with increasing age, prior medical issues. But ballpark 1k-2k euros per year, I'd guess. Once resident you could register and make social security contributions to qualify for state healthcare.

Once you've completed the immigration formalities, as a legal resident you can do "family reunification" to get your wife's (and your child's) residence permit (no visa required).

(4) There is no residence "type" in your case. You're entitled to residence as an EU citizen. Then your wife (child), ditto, as wife (child) of EU citizen / Spanish resident. So your choice is therefore between becoming a Spanish tax resident (more than 183 days) or not (less than 183 days). And, if the latter, where else are you spending your time? And do you want to keep paying taxes to Uncle Sam when you don't avail yourself of his services.

By way of contrast, I bought our little pad in Elche for 27k on Ebay, and it is a delight (after a gut renovation, of course). Our monthly expenses for this are around 150 euros a month. My partner's health insurance is 300 euros per year. We're pretty low-key (my idea of a trip is a hike along the Rio Vinalopo trail for a couple of hours, with a coffee and a napolitana at Mayte's on the way back), so we're quite comfortable on 1k a month. :-)

To avoid confusion, the justification for residence I previously listed (3 proofs: funds, home, health insurance) is for the "economically inactive" (retired/unemployed/lazy). EU citizens can justify their residence based on employment, self-employment, or studying too, but it's a bit of a faff IMHO. Once you have your residence permit you are not obligated  to stay economically inactive (unlike a no lucrativa visa, for example), so you can chill on the beach... or be self-employed... or start a Spanish business... or even take a job.

Also... with a child... you're just a teeny bit less mobile as they'll soon be fluent in Spanish and enjoying their local Spanish school. So it will be harder for you to avoid becoming a tax resident (there's a wife rule too, I think, so it makes it almost impossible even if you, personally, want to keep dodging). So it's probably worth figuring out the real impact before you make the decision to relocate.

For extra confusion, there are some taxes to pay even if you're not a Spanish tax resident. :-) e.g. property taxes on your Spanish properties, tax on rental income from your Spanish properties, tax on the imputed income from your Spanish home, tax on your Spanish wealth. I personally find the Bulgarian 10% flat tax on all forms of (actual) income much less stressful. :-)

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