If you’re an American living in Spain, you may not know that your child may have tax obligations in the US, despite not living there. The Local Spain spoke a US tax expert to find out what parents need to know.
If you are American and have moved to Spain you will have to continue filing your US tax declaration, as well as your Spanish one – but what about your children who have US citizenship?
Even if your children live their whole life in Spain, they may still have obligations to the US tax authorities if they have American citizenship.
The United States is one of the few countries where taxes are based on citizenship rather than residency. This means that a child who acquires US citizenship through an American parent may still fall under certain US reporting rules even while living in Spain.
Antonio Rodríguez, CEO of US Tax Consultants, a firm advising Americans in Spain on both taxation systems, explains how the rules generally work for children.
Does an American child in Spain have to file a US tax return?
Short answer is that it depends.
“US citizenship creates a lifelong tax filing obligation, even for children living abroad,” Rodríguez confirms. “This is a topic that often surprises US families in Spain,” he continues.
A child who has no income and no significant financial assets usually has no US filing requirement of their own. Generally, their only connection to the US tax system is being claimed as a dependent on a parent’s US tax return.
“A child is only required to file a US tax return if they meet certain thresholds: Earned income (e.g. part-time work) above annual limits or unearned income (interest, dividends, etc.) above relatively low thresholds. If they have no income, there is generally no filing requirement,” Rodríguez told The Local Spain.
What if I open a bank account in my child’s name?
In some cases reporting obligations can arise. One common example is if you open a bank account in Spain in your child’s name.
“If a U.S. child holds a non-US bank account, and the balance exceeds certain thresholds, they may have US reporting obligations, even if no tax is due, such as the FBAR (FinCEN Form 114) Foreign Bank Account Report and possibly FATCA (Form 8938). So yes — simply opening a Spanish account in a child’s name can create reporting obligations from a US perspective,” he confirms.
If the total value of foreign financial accounts exceeds $10,000 at any point during the year, a Foreign Bank Account Report (FBAR) may be required. The threshold applies to the combined balance of all foreign accounts.
For instance, if a child has two Spanish accounts containing $5,000 each and the combined balance goes above $10,000, the reporting requirement can be triggered.
Additional reporting requirements, such as Form 8938 for specified foreign financial assets, may apply at higher asset levels.
They may also have to file if they receive an inheritance. See below for more specifics.
What changes when your child becomes an adult?
This is where things might change, however the important thing is not the age of the child, but how much they are earning.
“Once the child begins working, they will almost certainly need to file US tax returns and Spanish tax returns as a Spanish resident” Rodríguez confirms.
Once your child starts to work and earns enough income to exceed the annual filing threshold (currently $15,750), or receives sufficient investment income, then they generally must file a US tax return. The key point is that if they earn enough money, they need to file.
Even if all the work is performed in Spain and Spanish taxes are paid, US citizens generally remain subject to US filing rules.
Those who earn under that $15,750 threshold per year – for example, students – remain listed as dependants on their parents’ tax return, but they don’t have to complete their own.
If a parent dies, a child who was previously a dependent does not automatically need to start filing taxes. They only need to file if their income exceeds IRS filing thresholds. They become an independent taxpayer when no one can claim them as a dependent anymore, which depends on support and living situation – not just age.
What about the US-Spain tax treaty?
One crucial thing to remember is that just because a person has to file in the US, that does not necessarily mean they will owe US tax.
“The US–Spain system is designed to prevent double taxation through the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credits (FTC). In practice, many young professionals file in both countries but pay most or all of their tax in Spain, because of the residency,” Rodríguez explains.
“The treaty helps by defining which country has primary taxing rights… however it’s important to understand that the treaty does NOT remove the US filing obligation, even if no US tax is ultimately due, a return is often still required,” he adds.
What are the rules on gifts and inheritance?
“For US tax purposes, receiving a gift or inheritance is generally NOT taxable income, however, there may be reporting requirements, especially if the gift/inheritance comes from a non-U.S. person, or it exceeds certain thresholds,” Rodríguez clarifies.
If a US citizen receives more than $100,000 from a foreign individual through a gift or inheritance, they may need to file Form 3520.
This is generally an information return, not a tax payment, but the penalties for failing to file can be substantial.
This does not apply to an inheritance from a US citizen – for example an American grandparent.
“From the Spanish side, inheritance and gift taxes do apply, so the key exposure is often in Spain rather than the US,” confirms Rodríguez.
What if you were unaware of these obligations?
Many ‘accidental’ Americans discover these obligations years later.
Don’t worry though, the IRS offers procedures designed for taxpayers who failed to file because they were unaware of the rules rather than intentionally avoiding them.
This procedure is called the Streamlined Filing Compliance Procedures. It means you can correct your mistake by filing the previous three years of tax returns and six years of foreign account reports, while explaining why you failed to file previously.
What are the filing deadlines for Americans living abroad?
US citizens living outside the United States receive an automatic two-month extension beyond the standard April 15th deadline, giving most overseas taxpayers until June 15th to file.
Taxes owed are generally still due from the original deadline, and interest may accrue on unpaid amounts. Additional extensions are available if needed.
Failing to file on time can lead to penalties of up to five percent of unpaid tax per month, capped at 25 percent.
It’s important to remember that Spain and the US are operating under two different tax systems. What makes sense from a Spanish tax perspective may not be optimal from an American one, so understanding both sets of rules is essential.
If you’re unsure of your US reporting or filing obligations, need help completing the forms or simply want advice regarding tax matters, it’s important to contact a tax professional who specialises in US tax law as well as Spanish ones.
