Expats Must Survey The Tax Landscape Before They Jump Into Any New Country

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The surge in interest shown by Americans looking to move out of the country should have many of those would-be expats asking about taxes in their new homes.

More Americans than ever seem to have moving abroad on their minds. Such a change involves preparing to handle many details. Unfortunately, planning for individual taxes in the new country isn’t always one of them.

Foresight into tax wrinkles open new nation can spare you a lot of headaches down the road. Here’s a tax overview of two of the popular destinations for new American expats.

Mexico

A tax resident is someone who has spent more than 183 days in Mexico in a year (consecutive or non-consecutive days, who has established a permanent residence in the country or who passes the Economic ties test, which can include owning a home, having a business or job in Mexico or having a spouse or dependents who are tax residents. 

The country’s primary individual tax form for residents is the Declaración Anual de Impuestos sobre la Renta, filed using Forma 22 annually, on April 30.

Wealthy American expats might first notice that Mexico has no inheritance, estate, gift or wealth tax among others. Some exceptions may also affect whether someone has to even file taxes in Mexico. Foreign nationals who work in the country and individuals who earn income from Mexican sources, such as rental or investment income, must file.

Mexican income tax rates, like those of the U.S. are progressive, topping out at just 30% for an annual income of some $392,842 (some 7.327 million Pesos, depending on your residency status).

A U.S. citizen or resident, you may be able to claim a foreign tax credit on your US tax return for taxes paid to the Mexican government. Similar arrangements work with the Social Security plans of both nations.

Expatriates must pay local state taxes to whatever Mexican state they live in, typically 1% to 3%.

Non-cash compensation is considered taxable in Mexico, including any benefits or taxes paid on your behalf by your employer.

Mexico imposes a value-added tax (VAT) on nearly all retail goods and services. When making purchases, you’ll typically see this tax added to the bottom of sales receipts just as you would a sales tax in the U.S. 

In most of Mexico, the VAT rate is 16%.

Mexico has a Social Security system that Mexican employers and employees must contribute to out of their salaries. The two countries have a Social Security Agreement that prevents double taxation on contributions.

The American Internal Revenue Service also kicks in few credits and deductions for American expats in Mexico (and several other nations);

The Foreign Earned Income Exclusion (FEIE) lets expats exclude a certain amount of foreign-earned income from U.S. taxation ($130,000 per qualifying individually for 2025.)

Foreign Tax Credit allows expats to deduct the income taxes paid to foreign governments from their U.S. tax bill, dollar for dollar.

Foreign Housing Exclusion lets expats deduct certain foreign country housing-related expenses from their US tax bill. (This exclusion is only available if you also claim the FEIE).

Spain

General notes for U.S. expats in Spain:

·      Conducting any economic activity in Spain or owning any assets triggers tax obligations.

·      The U.S.-Spain tax treaty aims to prevent double taxation. Generally, taxes paid in Spain can be credited against US tax liabilities on the same income.

·      The tax year spans the full calendar year and you declare all activites on your annual “declaración de la renta” return filed from May 1 until June 30 of the following year. If you earn less than €22,000 per year and that money comes from a single payer, you don’t need to file. You need to acquire an NEI number from the Spanish Tax Agency and determine if you are tax resident.

Tax resident versus non-tax resident is a big differentiator in the Spanish tax system. You’re a tax resident if you meet just one of the three following requirements: 

• You live in Spain more than 183 days per calendar year from January to December (days don’t need to be consecutive);
• You have economic interests in the country, meaning that you realize your professional activity in Spain, whether you work for a company or are self-employed;
• You have a spouse and/or children who live in Spain.

Employees in Spain can score big with the nation’s singular Beckham Law. Initially established to attract top talent into considering Spain as a business hub, the Beckham Law (named after the famous footballer who moved to Spain some 20 years ago). The law allows qualifying expats to be taxed as non-residents, even if they reside in Spain: Instead of being taxed on all worldwide income like most residents, you only pay tax on income earned inside Spain and then only up to a flat 24% up to €600,000/year). There’s also no Spanish tax on foreign income, including foreign rental income dividends and interest from foreign accounts, capital gains from assets outside Spain; and no wealth tax on foreign assets.

To qualify for this potentially lucrative income tax break, you must not have resided in Spain during the five years prior to the application for this exemption, have a job contract and the work that must have to be performed in the Spanish territory (there are certain flexibilities).  

Spain, like many nations, does levy stinging wealth taxes at times of sale, but often they’re only applicable to highly valued assets after a personal allowance of €700,000 (€300,000 if you selling your own home).

Calculating capital gains in Spain essentially resembles calculating it other countries: Determining the difference between the sale price and the acquisition cost of the asset, adjusted for allowable deductions and improvements. 

Spain also offers a number of deductions, to while capital gains. If the proceeds from the sale of your primary residence are reinvested into purchasing or rehabilitating another main residence within two years in Spain, for instance, the capital gain may be exempt from tax. (This doesn’t apply to non-residents.

Tax residents 65 or older are exempt from capital gains tax on the sale of their primary residence, provided they have lived in the property for at least three years.)

Individuals over 65 who reinvest gains from the sale of any asset (up to €240,000) into a life annuity within six months are exempt from the capital gains tax.

In addition to the 19% flat tax, non-residents selling property in Spain are subject to a 3% withholding tax. If the actual capital gains tax due is less than the 3% withheld, or if a loss is incurred, the seller can apply for a refund of the excess amount.

There are three taxes you might pay for buying a property in Spain:

·      Property transfer tax, a progressive tax that applies to second-hand properties. It ranges from 8 to 10% of the agreed-upon price of the property.

·      Those buying a house from a developer : Value-added tax usually 10%), and the stamp duty (1.5% in Barcelona).

·      Value Added Tax VTA or, in Spain (“IVA) or Sales tax: It is the same tax you will already find applied in any product you purchase. The standard VAT rate is 21%, even though there is also the reduced 10% and 4% VAT. Some products don’t even apply VAT.

Expatriation is sure to only grow as a public interest in the coming months in America. US. Expats can make this move – but they must pay attention to wat the move means for their taxes as well as every part of their life.

Next up: The U.K. and Italy.

Your tax specialist needs to stay on top of this and many other issues of wealth, foreign income and tax enforcement. If we can help, please let us know.

About the Author 

Alicea Castellanos is the CEO and Founder of Global Taxes LLC. Alicea provides personalized U.S. tax advisory and compliance services to high-net-worth families and their advisors.

Alicea has more than 20 years of experience. Prior to forming Global Taxes, Alicea founded and oversaw operations at a boutique tax firm, worked at a prestigious global law firm and CPA firm.

Alicea specializes in U.S. tax planning and compliance for non-U.S. families with global wealth and asset protection structures which include non-U.S. trusts, estates and foundations that have a U.S. connection.

Alicea also specializes in foreign investment in U.S. real estate property, and other U.S. assets, pre-immigration tax planning, U.S. expatriation matters, U.S. persons in receipt of foreign gifts and inheritances, foreign accounts and assets compliance, offshore voluntary disclosures/tax amnesties, FATCA registration, and foreign companies wanting to do business in the U.S.

Alicea is fluent in Spanish and has a working knowledge of Portuguese.

Alicea is an active member of the Society of Trusts & Estates Practitioners (STEP), the New York State Society of Certified Public Accountants (NYSSCPAs), the American Institute of Certified Public Accountants (AICPA), the International Fiscal Association (IFA), a member of Clarkson Hyde Global, a world-wide association of accountants, auditors, tax specialists and business advisors and the Global Referral Network (GRN).

Distinctly, in 2020, Alicea was awarded with a prestigious NYSSCPA Forty Under 40 Award. She was selected as someone that has notable skills and is visibly making a difference in the accounting profession.

In 2021 and 2022, Alicea was the Gold and Silver Winner, respectively, of Citywealth’s Powerwomen Awards in the category USA – Woman of the Year – Business Growth (Boutique). In 2023, she continued her winning streak by receiving the Gold award for Company of the Year Female Leadership (Boutique) and the Silver award for Accountancy Firm of the Year at the Magic Circle Awards. Furthermore, Alicea has consistently secured her position in the Global Elite Directory for four consecutive years, being recognized as a Private Client Global Elite Advisor and is currently listed for 2024 as a Non-Legal Adviser. This exclusive directory annually highlights the world’s elite lawyers and outstanding wealth advisors serving ultra-high net-worth clients.

Please note: This content is intended for informational purposes only and is not a replacement for professional accounting or tax preparatory services. Consult your own accounting, tax, and legal professionals for advice related to your individual situation. Any copy or reproduction of our presentation is expressly prohibited. Any names or situations have been made up for illustrative purposes — any similarities found in real life are purely coincidental.