Portugal and a US Annuity: Category H, the 85% Rule and What the US Adds
Written by Hans Goldstein, EA, licensed insurance agent · CA 4273294Admitted to practice before the IRS
Short answer: Portugal taxes a life annuity as category H pension income at progressive rates of 12.5% to 48% in 2026, but only on the income part: the capital part is deducted, or 85% of the check is set aside when it cannot be separated (CIRS art. 54). NHR is closed and IFICI does not cover pensions, so a new retiree has no special rate. On an illustrative $35,000 check the total for a US citizen is about the higher of the two countries’ taxes: $2,200 if the 85% rule applies, $3,110 if Portugal taxes only a US-style gain share at an assumed 31.1%. Portugal has no net wealth tax.
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Portugal used to be the easy answer for American retirees because of the non-habitual resident (NHR) regime. That door is closed for a new arrival. What is left is ordinary progressive tax, but on a life annuity only the income part is taxed, which keeps the bill moderate.
How Portugal taxes each check
Portugal lists “rendas temporárias ou vitalícias” (term or life annuities) as pension income, category H of the personal income tax (Portal das Finanças, CIRS art. 11(1)(d), checked 18 Oct 2026). When a life annuity includes a repayment of capital, the capital part is deducted before tax. If the capital part cannot be separated, an amount equal to 85% of the whole payment is deducted, so 15% is taxable (Portal das Finanças, CIRS art. 54(1) and (2), checked 18 Oct 2026). The text does not distinguish by the insurer’s country, which is why a US contract can use it.
Two cautions. First, the special pension deduction does not apply to a life or term annuity that is not paying a pension of the employment or social-security kind (Portal das Finanças, CIRS art. 53(7), checked 18 Oct 2026), so a purchased annuity does not get it. Second, I found no ruling on how the tax authority wants a US insurer to show the capital part. Ask your insurer for a yearly statement that splits the payment into capital and income, and ask a Portuguese adviser which rule the authority applies. That is why my example below runs two cases.
The 2026 rates are 12.5% up to €8,342 of taxable income, then 15.7%, 21.2%, 24.1%, 31.1% (to €29,397), 34.9% (to €43,090), 43.1%, 44.6% (to €86,634) and 48% above that (Portal das Finanças, CIRS art. 68, as amended by Lei 73-A/2025, checked 18 Oct 2026). A solidarity surcharge of 2.5% above €80,000 and 5% above €250,000 applies on top (PwC Worldwide Tax Summaries: Portugal individual taxes on personal income, checked 18 Oct 2026).
DIA and MYGA. A deferred income annuity pays the same kind of check once it starts, so the annuity rules above apply to the checks. For a MYGA or a lump sum from a deferred contract I found no verified Portuguese rule on whether the gain is taxed as it builds or only when withdrawn, so I will not state one. The code does say that cashing out or advancing a pension-type income does not change its nature as category H (CIRS art. 11(2), checked 18 Oct 2026), but whether a MYGA gain is pension income is not settled.
NHR and IFICI: no regime for a retiree
The NHR regime, with its 10% rate on foreign pensions, was revoked from 1 January 2024, with a transition only for people already registered or who met the conditions by 31 December 2023 or became residents by 31 December 2024 (PwC Worldwide Tax Summaries: Portugal, tax credits and incentives, checked 18 Oct 2026). Its replacement, IFICI, is a 20% rate on employment and self-employment income from listed activities (researchers, qualified jobs, start-ups and similar), for 10 years (Estatuto dos Benefícios Fiscais art. 58-A(1) and (2), checked 18 Oct 2026). It does not cover category H, and PwC says pension income is excluded from its foreign-income exemption. A retiree arriving now has no special regime.
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Estimates use the September 9, 2026 ImmediateAnnuities.com payout survey (life only) and a 15% cushion. Illustrative, not a quote.
The treaty, and who taxes first
Article 20(2) of the US-Portugal treaty makes annuities taxable only in the country of residence, and defines an annuity as a stated sum paid periodically during a specific time period, again without the word life. If a life-only SPIA does not fit that definition, Article 24 (other income) lets the residence country tax it and also lets the US tax it when it arises in the US. The saving clause is in paragraph 1(b) of the Protocol, so the US keeps taxing you as a citizen. Article 25(2) then treats the income of a US citizen resident in Portugal as arising in Portugal to the extent necessary to avoid double taxation, and Article 25(3)(a) has Portugal deduct US tax on income the treaty lets the US tax (IRS: US-Portugal treaty Arts. 20(2), 24, 25 and Protocol 1(b), checked 18 Oct 2026).
The result is the same as in Spain: the foreign tax credit absorbs the Portuguese tax, and the total is about the higher of the two. The US taxes only the gain share (IRC 72(b)); Portugal taxes the base from the rules above.
Wealth tax, exit tax and inheritance
PwC reports no net wealth tax in Portugal; real estate carries its own property taxes (PwC Worldwide Tax Summaries: Portugal, other taxes, checked 18 Oct 2026). The same page does not mention an exit tax, and I found none that covers an annuity contract. Your US citizenship-based tax stays with you.
Inheritance. Portugal taxes free transfers (inheritances and gifts) through stamp duty, at 10% (PwC Worldwide Tax Summaries: Portugal, other taxes, checked 18 Oct 2026). For the refund or death benefit of a life contract, the stamp duty code says that credits arising from life insurance are not subject to the stamp duty on free transfers (Portal das Finanças, Código do Imposto do Selo art. 1(5)(a), checked 18 Oct 2026), spouses, descendants and ascendants are exempt anyway (Código do Imposto do Selo art. 6(1)(e), checked 18 Oct 2026), and the tax reaches facts that occur in Portuguese territory (Código do Imposto do Selo art. 4(1), checked 18 Oct 2026). Whether a refund paid by a US insurer to a US-resident heir has any Portuguese link is not settled, and I found no ruling that treats a cash-refund payment as a return of capital for a living annuitant.
Dollar risk
The annuity pays in US dollars, so your cost of living in euros moves with the exchange rate. Over the 20 years from 16 Oct 2006 to 9 Oct 2026, the Federal Reserve H.10 series shows euros per dollar between 0.62 (22 Apr 2008) and 1.04 (27 Sep 2022), and 0.89 on 9 Oct 2026 (FRED DEXUSEU, inverted to euros per dollar, checked 18 Oct 2026). On an illustrative $35,000 check that range is about €21,861 to €36,398 a year in euros, and €31,270 at the latest rate. This is not a forecast. A home or other assets in euros partly offset the swing, and a dollar annuity then acts as a floor.
Worked example: $500,000 life-only SPIA, US citizen resident in Portugal
The US side is the same in every country. I use a non-qualified life-only single premium immediate annuity (SPIA) of $500,000, bought at 65, with an illustrative payout of 7.0%, which is $35,000 a year (illustrative, not a quote). Under IRC 72(b) the tax-free share of each check is the premium divided by the expected return. IRS Publication 939 Table V gives a multiple of 20.0 at age 65, so the expected return is $700,000 ($35,000 x 20.0) and the exclusion ratio is 71.4%. That makes $25,000 of each check tax-free and $10,000 taxable. The exclusion stops once the $500,000 premium is recovered, about year 20; after that the whole check is taxable (IRC 72(b)(2) caps the excluded total at the unrecovered investment) (26 U.S.C. 72(b), checked 18 Oct 2026) (IRS Pub. 939 Table V, checked 18 Oct 2026). At 70 the multiple is 16.0, the exclusion ratio 89.3% and the taxable part $3,750 a year.
For Portugal I use an assumed 31.1% marginal rate (the band for taxable income of €23,089 to €29,397, which assumes you have other income) and an assumed 22% US federal rate on the gain share (IRS: for 2026 the 22% bracket starts at $50,400 for single filers, checked 18 Oct 2026). Case A is the 85% fallback. Case B assumes the tax authority accepts a capital part equal to the US exclusion ratio, which is my assumption, not a ruling. I ignore currency conversion and the solidarity surcharge, and I use the same $35,000 check at 70.
| Step (illustrative, not a quote) | Start at 65 | Start at 70 |
|---|---|---|
| Yearly check (7.0% of $500,000) | $35,000 | $35,000 |
| Tax-free on the US return / taxable gain share | $25,000 / $10,000 | $31,250 / $3,750 |
| US tax on the gain share at an assumed 22% | $2,200 | $825 |
| Case A: Portugal cannot split capital, 85% set aside: base | $5,250 | $5,250 |
| Case A: Portuguese tax at an assumed 31.1% | $1,633 | $1,633 |
| Case A: total, Portugal plus US | $2,200 | $1,633 |
| Case B: capital part split like the US ratio: base | $10,000 | $3,750 |
| Case B: Portuguese tax at an assumed 31.1% | $3,110 | $1,166 |
| Case B: total, Portugal plus US | $3,110 | $1,166 |
In Case A at 65 the 85% rule keeps the Portuguese tax of $1,633 below the US tax of $2,200, so the US tax decides; at 70 the US gain share shrinks to $825 of tax, so Portugal decides. In Case B at 65 the Portuguese tax of $3,110 is above the US tax of $2,200, so Portugal decides and the unused credit is carried over under US rules. The age at the start does not change the Portuguese base, only the US side.
How to use this
I am a US-licensed insurance agent and an Enrolled Agent, admitted to practice before the IRS. I can only help with a US annuity while you still live in the US, so buy before you move. I do not give Portuguese tax or legal advice: get a local adviser’s written view on the open points above before you sign anything. Everything here is education, not tax advice, and every payout is an illustration, not a quote.
Married? Make the income outlive either of you. In Portugal the main applicant shows the income and the spouse joins as a family member, so the annuity sits with the main applicant. If a single-life annuity is on one spouse and that spouse dies first, the payments stop, and the surviving spouse may have to show income of their own at the next renewal. A joint and survivor annuity, which keeps paying until the second death, or a separate annuity on each spouse closes that gap. Joint and survivor pays less per dollar than single life, so ask for both quotes and compare.
Frequently asked questions
Related reading
- Moving abroad on a fixed income: the hub
- Where a US annuity is tax-smart abroad
- How Europe taxes a US annuity
- Portugal D7 visa income requirement
- Wealth tax by country and US annuities
- Spain: US annuity tax for retirees
- Greece: US annuity tax for retirees
Sources
- Portal das Financas: CIRS art. 11 (category H, annuities)
- Portal das Financas: CIRS art. 53 (pension deduction)
- Portal das Financas: CIRS art. 54 (capital vs income)
- Portal das Financas: CIRS art. 68 (2026 rates)
- Portal das Financas: Estatuto dos Beneficios Fiscais art. 58-A (IFICI)
- IRS: United States and Portugal income tax convention (Arts. 20, 24, 25, Protocol)
- Portal das Financas: Codigo do Imposto do Selo arts. 1, 4, 6
- PwC Worldwide Tax Summaries: Portugal, tax credits and incentives (NHR, IFICI)
- PwC Worldwide Tax Summaries: Portugal, taxes on personal income
- PwC Worldwide Tax Summaries: Portugal, other taxes
- 26 U.S.C. 72 (annuity exclusion ratio, 72(b))
- IRS Publication 939 (Rev. December 2025), Table V
- IRS: 2026 tax inflation adjustments (22% bracket)
- Federal Reserve H.10 via FRED: dollars per euro (DEXUSEU), pulled 18 Oct 2026
Goldstein & Co. LLC dba Goldstein Insurance Services · Hans Goldstein, licensed insurance agent, CA lic. #4273294 · NPN 20602398 · 213-414-2808 · hans@hansgoldstein.com
Education, not tax, legal or immigration advice. Rules, thresholds and exchange rates change; confirm with the consulate or immigration authority and a local tax adviser before you act, and get answers in writing. Hans Goldstein is a licensed insurance agent (CA 4273294) and can only offer annuities to residents of states where he is licensed. Annuity payments are guaranteed by the issuing insurer’s claims-paying ability, not by any government. Payout figures are illustrations from a published survey, not quotes. Immediate annuities are generally irrevocable.