American's guide to living in the Canary Islands: Paradise with tax realities
Living in the Canary Islands has become increasingly attractive for Americans who want year‑round sunshine, lower day‑to‑day costs, and a more relaxed Spanish lifestyle.
Recent years have seen tens of thousands of people relocate to the archipelago, as these islands off the African coast offer digital nomads, retirees, and remote workers a realistic alternative to high‑priced US cities.
Before moving, however, it is important to understand both the financial advantages and the ongoing US tax rules that continue to apply while living abroad.
WHY AMERICANS ARE CHOOSING THE CANARY ISLANDS
The appeal of the Canary Islands is clear. Average temperatures stay between 18–26°C (64–79°F) throughout the year, so there is no harsh winter and far less need for heating or air conditioning than in many parts of the United States.
Housing is also more affordable: typical one‑bedroom apartments in central areas often start around €800–1000 per month, which is roughly half the level seen in cities like Madrid or Barcelona and much lower than rents in major US hubs such as New York or San Francisco.
The islands have developed into a strong base for remote workers, supported by sectors such as animation and digital media, where hundreds of professionals benefit from targeted tax incentives for international projects.
Good internet coverage, modern coworking spaces, and established expat communities make it practical to keep a US‑based job or client base while living in Spain.
While the lower cost of living is attractive, Americans must remain vigilant about their cross-border financial responsibilities. Understanding how expats taxes work is essential, as US citizens are required to file federal returns regardless of where they reside.
Overall cost‑of‑living comparisons show that the United States is roughly 70–75% more expensive than the Canary Islands, especially for housing, childcare, entertainment, and many everyday services.
YOUR VISA PATH TO PARADISE
Americans require a residency visa to live in Spain for more than 90 days. Choosing the best option depends on your work situation and financial goals.
Digital Nomad Visa
The Digital Nomad Visa is the top choice for remote professionals. To qualify, you must prove an income of at least €2,400 per month (approx. $2,600) from employers outside Spain.
- Duration: Initial residency for three years, renewable for two more.
- Tax benefit: You pay a reduced flat tax rate of 24% on income up to €600,000, which is significantly lower than Spain’s standard progressive rates that can reach 47%.
Non-Lucrative Visa
This visa is ideal for retirees or individuals with passive income who do not plan to work locally.
- Requirements: You must demonstrate financial stability (approx. €2,400/month for an individual) and hold full private health insurance.
- Restriction: You cannot engage in any professional work in Spain under this visa.
Golden Visa
Designed for investors, the Golden Visa offers expedited residency for those who purchase Spanish real estate worth €500,000 or more. It provides flexibility, as there is no requirement to live in Spain full-time to renew it.
THE TAX REALITY AMERICANS CAN'T IGNORE
A major surprise for many Americans is that US citizenship requires you to file federal taxes every year, regardless of where you live. The IRS taxes your worldwide income, so even if you are fully settled in Las Palmas or Tenerife, you must still report your earnings to the US authorities.
While this dual obligation can seem daunting, specific IRS provisions are designed to prevent you from paying tax twice on the same income.
Key tax provisions that protect you:
- Foreign Earned Income Exclusion (FEIE): For the 2025 tax year, you can exclude up to $130,000 of your foreign-earned income from US federal tax. If you are married and both spouses qualify, you can exclude up to $260,000 combined.
- Foreign Tax Credit (FTC): This allows you to claim a credit for income taxes paid to Spain against your US tax bill. Since Spanish income tax rates (ranging from 19% to 47% for residents) are generally higher than US rates, the FTC often eliminates any remaining US tax liability on that income.
Qualifying for the exclusion
To use the FEIE, you must meet one of two tests:
- Physical Presence Test: You must be physically present in a foreign country for at least 330 full days during any 12-month period.
- Bona Fide Residence Test: You must be a genuine resident of Spain for an uninterrupted period that includes an entire tax year.
Because Spain’s tax rates are typically higher than those in the US, many expats find that applying the Foreign Tax Credit effectively reduces their US tax bill to zero. In essence, you receive credit for the taxes you have already paid to the Spanish government.
REQUIRED FINANCIAL REPORTING
In addition to filing your standard income tax return, you may have specific reporting obligations for your foreign accounts. You must file an FBAR (FinCEN Form 114) if the combined balance of all your foreign financial accounts exceeds $10,000 at any point during the calendar year. This form is filed electronically with the Treasury Department, not the IRS.
If you have higher-value assets, you may also need to file Form 8938 (FATCA) with your tax return. This applies if you hold specified foreign financial assets worth more than $200,000 at year-end (or $300,000 at any time during the year) for single filers residing abroad. For married couples filing jointly, these thresholds double.
It is critical to take these requirements seriously. Under intergovernmental agreements, Spanish banks automatically report account details of US citizens to the IRS. Failure to file correct forms can lead to steep penalties, starting at $10,000 per violation for non-wilful errors.
Given the complexity, many expats choose to work with specialised tax professionals to ensure they remain compliant with both US and Spanish regulations.
Spanish tax residency rules
You will generally be considered a tax resident of Spain if you meet any of the following criteria:
- You spend more than 183 days in Spain during the calendar year.
- Your "centre of vital interests" (main economic or professional activities) is in Spain.
- Your spouse and/or minor children live in Spain and are tax residents there.
As a Spanish tax resident, you are liable for taxes on your worldwide income at progressive rates. Non-residents, including those on certain visa types who do not trigger residency rules, typically pay a flat tax rate (such as 24%) only on income sourced within Spain.
WHY THE CANARY ISLANDS MAKE FINANCIAL SENSE
Beyond considerably lower living costs, the Canary Islands offer specific tax advantages that improve your financial position as an American resident.
Special tax zones
The Zona Especial Canaria (ZEC) provides qualifying companies with a reduced corporate tax rate of just 4% - one of the lowest in Europe. Additionally, the local indirect tax (IGIC) is set at only 7% compared to Spain's standard mainland VAT of 21%, resulting in savings on nearly all goods and services purchased on the islands.
These incentives have attracted a wide array of international startups, tech firms, and digital businesses looking to reduce operational costs.
For remote workers holding a Digital Nomad Visa, the combination of the 24% flat tax rate and the ability to claim the Foreign Earned Income Exclusion (FEIE) typically means that many pay little to no US federal tax while also benefiting from lower Spanish rates than standard residents.
When you factor in cheaper housing, groceries, and entertainment, your actual purchasing power increases substantially compared to living in most US metropolitan areas.
Choosing your island
Each island within the archipelago has its own character and lifestyle.
- Gran Canaria (Las Palmas): Urban amenities, lively cultural scene, and the largest expat community.
- Tenerife: Diverse geography from beach resorts to mountain villages, with excellent infrastructure and accessibility.
- Lanzarote and Fuerteventura: Quieter environments focused on nature, volcanic landscapes, and outdoor activities - ideal for those seeking a slower pace.
The islands are also conveniently located for travel, offering easy access to mainland Europe and North Africa for weekend getaways or business trips.
Planning your move
Start your planning 6-12 months before your intended move date.
1. Research and documentation: Review visa requirements thoroughly and gather necessary documents, including proof of income, health insurance, FBI background checks (apostilled), and bank statements.
2. Community connection: Join online expat communities, forums, and Facebook groups to get practical advice on everything from apartment hunting to navigating local bureaucracy.
3. Exploratory visit: Consider visiting the islands first to explore different neighbourhoods and experience daily life firsthand.
4. Budgeting: Prepare for initial setup costs, including visa application fees, flights, temporary accommodation while securing long-term housing, and purchasing essential furniture or supplies.
The Canary Islands represent more than just a change of scenery - they offer Americans a genuine opportunity to reduce living expenses by up to 75%, enjoy superior weather year-round, and maintain career momentum through remote work, all while navigating manageable tax obligations with proper planning.
The key is understanding both the opportunities and the responsibilities before you make the leap.
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