If you’re a US national living in Spain, taxes can be particularly confusing. Find out if your US social security benefits can be taxed here or not.
There has been much confusion in various online forums recently among Americans in Spain as to whether or not US social security benefits taxed here or not.
Increasingly more and more Americans are choosing to retire in Spain and often come on Spain’s Non-Lucrative Visa in order to do so. If you come on this visa, spend more than 183 days a year here, your main economic interests are here and your spouse or children live here, then you will generally be considered a tax resident in Spain.
Under the non-lucrative visa conditions, you are not allowed to work either in Spain or remotely for companies abroad, but your passive income such as pension or retirement benefits, rent from properties abroad etc is generally taxed here in Spain.
The issue for Americans comes because even US-citizens who reside abroad are taxed in the US.
The good news though is that there’s a double tax treaty between Spain and the United States, which has been in place since 1990, which means you can’t be taxed twice on the same income.
Article 20 of that treaty states that only the United States has the right to tax public pensions or social security, while private pensions are taxed by the country where you live ie. Spain.
Law Firm LexTax Consulting confirms that this means that if you live in Spain and receive social security, Spain cannot tax it.
READ ALSO: Do I have to pay tax in Spain on the non-lucrative visa?
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It’s important to remember though, if you receive a private pension payout on top of your public one or social security, then this will be taxed in Spain.
Even though your social security isn’t taxed here, LexTax Consulting states that you must declare it here in Spain.
This means declaring this income on your yearly Personal Income Tax or IRPF tax return. If you fail to do this, you could be subject to fines and penalties.
This is important because Spain applies what is known as exemption with progression. This means that while social security isn’t taxed, that amount is added to your other income such as rent from abroad, investments or a private pension to work out your tax rate.
It can be difficult to get your head around, so here’s an example to help.
If you get $15,000 in social security from the US per year and you have a private pension of $25,000, your total tax base will be $40,000.
Even though you would have fallen into the 30 percent tax bracket on your private pension of $25,000, your base amount has been pushed up because of your social security benefit. This means a higher rate of 37 percent could be applied private pension.
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Of course, many different factors and personal circumstances affect this amount, so it’s important to speak with a tax professional to find out the exact rate that you would pay.
LexTax Consulting confirms that even if you don’t pay tax on your US social security in Spain, you are still required to file a federal tax return in the US and it can still be taxed there. According to the firm, the IRS can tax up to 85 percent of your Social Security benefits, depending on your combined income.
Similar to US-social security benefits, government and military pensions are generally only taxed in the US.
Getting tax advice from a professional in these matters is very important as cross-border tax issues can be complicated. Not only that, but you need to get one who is knowledgeable about US tax issues too. If you simply hire a Spanish accountant or lawyer who only knows about Spanish law, you may be given the wrong advice.
Our reporters at The Local Spain are not tax professionals, and the information in our articles should not be taken as financial advice. Always ask a professional if you’re unclear on anything and need advice.
