US Expat Nonresident Taxes: Mistakes to Avoid

US Expat Nonresident Taxes: Mistakes to Avoid

US expat nonresident taxes can be tricky, especially when you are navigating both US and Spanish tax systems. Whether you are a US citizen living in Spain or a nonresident alien with US-source income, the rules are strict and the penalties for mistakes are real. At Costa Expat, we see the same errors repeated year after year. This guide will walk you through the most common mistakes and how to avoid them, so you can stay compliant and avoid unnecessary costs.

Who Is a Nonresident Alien?

Before diving into mistakes, it's crucial to understand your tax status. The IRS defines a nonresident alien as someone who is not a US citizen and does not meet the green card test or the substantial presence test. If you are a US citizen or resident alien living abroad, you are still subject to US taxation on your worldwide income. Nonresident aliens, on the other hand, are taxed only on US-source income and must file Form 1040-NR. Confusing these statuses is a costly mistake.

Many US expats in Spain assume that living abroad automatically makes them nonresident aliens for US tax purposes. That is false. US citizens and green card holders remain resident aliens for tax purposes, regardless of where they live. They must file Form 1040 and report worldwide income. Nonresident aliens—typically foreign nationals who do not meet the substantial presence test—file Form 1040-NR. Using the wrong form can lead to incorrect calculations, penalties, and delays.

Common Mistakes on Form 1040-NR

Using the Wrong Form

One of the most frequent errors is filing Form 1040 when you should file Form 1040-NR, or vice versa. This mistake often stems from confusion about residency status. If you are a nonresident alien, filing Form 1040 can result in claiming deductions and credits you are not entitled to, such as the standard deduction. In general, nonresident aliens cannot claim the standard deduction unless they are residents of certain treaty countries. Filing the wrong form can trigger audits and penalties.

Claiming the Standard Deduction Improperly

Nonresident aliens are generally not allowed to claim the standard deduction. However, some tax treaties allow certain nonresidents to claim it. For example, students and business apprentices from India may be eligible. If you claim it without meeting treaty requirements, the IRS will likely reject your return and assess additional tax. Always check your treaty eligibility before claiming this deduction.

Forgetting Schedule OI

Schedule OI (Other Information) is a required attachment to Form 1040-NR. It asks about your visa type, days present in the US, and treaty benefits. Missing this schedule can cause the IRS to reject your return or delay processing. Many first-time filers overlook it because it seems like a formality, but it is mandatory.

Not Reporting US-Source Income Correctly

Nonresident aliens must report all US-source income, including wages, dividends, interest, rents, and royalties. Failing to report certain types of income, such as capital gains from US real estate, can lead to penalties. For example, if you sold a property in the US, you may be subject to FIRPTA withholding and must file a US tax return to report the sale.

FBAR and Foreign Account Reporting

If you are a US citizen or resident alien living in Spain, you must report foreign financial accounts if the aggregate value exceeded $10,000 at any point during the calendar year. This is done via FinCEN Form 114, commonly known as FBAR. Nonresident aliens are generally not required to file FBAR unless they are engaged in a US trade or business. However, many US expats mistakenly believe they are exempt because they live abroad. The penalties for not filing FBAR are severe: up to $10,000 per non-willful violation and up to $100,000 or 50% of the account balance for willful violations.

In addition to FBAR, you may need to file Form 8938 (Statement of Specified Foreign Financial Assets) if your foreign assets exceed certain thresholds. These thresholds are higher than FBAR and depend on your filing status. For example, a single filer living abroad must file Form 8938 if the total value of foreign assets exceeds $200,000 on the last day of the year or $300,000 at any point during the year. Married filing jointly has higher thresholds. Failing to file Form 8938 can result in a $10,000 penalty, with additional penalties for continued non-compliance.

State Tax Traps After Moving Abroad

Many US expats forget that moving abroad does not automatically sever state tax residency. Some states, like California and Virginia, are aggressive about claiming residency unless you take specific steps to establish domicile elsewhere. For example, if you maintain a driver's license, voter registration, or a permanent home in a state, that state may still consider you a resident for tax purposes. This means you could owe state income tax on your worldwide income even while living in Spain.

To avoid this, you must cut ties with your former state. This typically involves obtaining a driver's license in your new country, registering to vote there if possible, and selling or renting out your US home. Some states require you to file a part-year resident return in the year you leave. Consulting a tax professional who understands both US and Spanish tax law is essential to navigate these rules.

Spanish Tax Obligations for US Expats

If you are a US expat living in Spain, you are likely considered a Spanish tax resident if you spend more than 183 days per year in the country. As a Spanish tax resident, you must report your worldwide income to the Spanish tax authority, Agencia Tributaria. This includes income from US sources, such as Social Security, pensions, and investment income. The US-Spain tax treaty helps avoid double taxation, but you must know how to claim foreign tax credits or exemptions.

One common mistake is failing to file Modelo 720, which requires Spanish residents to declare assets located outside Spain exceeding €50,000 per category (accounts, securities, real estate). The penalties for not filing Modelo 720 can be substantial, though they were reduced in recent years. Another mistake is not reporting US retirement accounts correctly. Spain may tax distributions from US IRAs and 401(k)s, but the treaty may provide relief. Proper planning is key.

For nonresident aliens with Spanish-source income, such as rental income from a property in Marbella, you must file Spanish nonresident income tax (IRNR) using Modelo 210. The tax rate is generally 19% for EU residents and 24% for non-EU residents, though treaty benefits may apply. Failing to file can result in penalties and interest. If you own property in Spain, you should also be aware of imputed income tax, which applies even if the property is not rented out.

How Costa Expat Can Help

Navigating US expat nonresident taxes and Spanish tax obligations can be overwhelming. At Costa Expat, we specialise in helping US expats on the Costa del Sol stay compliant with both US and Spanish tax laws. Our bilingual team in Fuengirola provides expert guidance on non-resident tax Spain, NIE Spain, and buying property Spain foreigner. We also assist with residency Spain applications, including the Digital Nomad Visa Spain and Golden Visa Spain Marbella.

Whether you are a British expat in Spain, a US expat in Marbella, or a digital nomad in Málaga, we offer personalised advice to avoid costly mistakes. Our services include tax return preparation for both US and Spanish filings, FBAR and Modelo 720 assistance, and representation before the IRS or Agencia Tributaria. We also help with company formation Spain foreigner for entrepreneurs.

Don't let tax mistakes ruin your expat experience. Get a free consultation with Costa Expat today. We serve clients across the Costa del Sol, including Marbella, Mijas, Benalmádena, Estepona, Nerja, and Torremolinos.

FAQ

Do US expats have to file FBAR?

Yes, US citizens and resident aliens living abroad must file FBAR (FinCEN Form 114) if the aggregate value of their foreign financial accounts exceeded $10,000 at any point during the calendar year. Nonresident aliens are generally not required to file FBAR unless they are engaged in a US trade or business. However, many US expats mistakenly believe they are exempt because they live abroad. The penalties for not filing FBAR are severe, so it's crucial to determine your filing requirement accurately.

Can I claim the Foreign Earned Income Exclusion (FEIE) if I live in Spain?

Yes, if you are a US citizen or resident alien living in Spain and you meet the bona fide residence test or physical presence test, you can claim the FEIE to exclude a certain amount of foreign earned income from US taxation. However, the FEIE only applies to earned income, such as wages and self-employment income. It does not cover passive income like dividends, interest, or rental income. You must file Form 2555 to claim the exclusion. Many expats incorrectly assume the FEIE eliminates all US tax obligations, but you may still owe tax on passive income or self-employment tax.

What is Modelo 720 and do I need to file it?

Modelo 720 is a Spanish tax form that requires Spanish tax residents to declare assets located outside Spain exceeding €50,000 per category (accounts, securities, real estate). If you are a US expat living in Spain and you meet the Spanish tax residency threshold (more than 183 days per year), you must file Modelo 720 if your foreign assets exceed the thresholds. The form is due between January 1 and March 31 each year. Failing to file can result in penalties, though they were reduced in recent years. It's important to report accurately to avoid issues with the Spanish tax authority.

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How can Costa Expat help with my US and Spanish taxes?

Costa Expat provides comprehensive tax services for US expats in Spain. We assist with US federal tax returns (Form 1040 or 1040-NR), FBAR, Form 8938, and state tax returns. On the Spanish side, we help with Modelo 210 (nonresident income tax), Modelo 720, and Spanish income tax returns. Our bilingual team in Fuengirola offers personalised advice to ensure compliance with both jurisdictions. We also provide representation before the IRS and Agencia Tributaria. Contact us for a free consultation to discuss your specific situation.

Referencias

• Instituto Nacional de Estadística
• Boletín Oficial del Estado