OK, thanks! I did find the TAX CONVENTION WITH ICELAND, and here are the key points from the treaty relevant to an Icelandic citizen living in the US, being a US tax resident, and having to pay taxes in the US on income from an Icelandic pension savings account are:
General Rules of Taxation (Article 4): A resident of one Contracting State (the US) may be taxed by the other Contracting State (Iceland) on income from sources within that other Contracting State (Iceland).
Relief from Double Taxation (Article 5): To avoid double taxation, the US shall allow a credit against the US tax for the appropriate amount of Icelandic tax paid on the income.
Private Pensions and Annuities (Article 24): Pensions and other similar remuneration paid to an individual who is a resident of one of the Contracting States (the US) in consideration of past employment shall be taxable only in that Contracting State (the US).
Therefore, the income from the Icelandic pension savings account will be taxable only in the US, and the individual can claim a credit for any Icelandic tax paid on that income to avoid double taxation.
