Introduction
The U.S. government’s suspension of the U.S.–Russia Income Tax Convention, effective 2024, has created significant uncertainty for taxpayers with ties to Russia—especially those receiving Russian pension income. Before the suspension, many U.S. persons relied on Article 17 (Pensions and Annuities) of the treaty to exclude or defer taxation on Russian-source pension income. Now that the treaty’s benefits have been suspended, these pensions are fully subject to U.S. taxation and must be evaluated for FBAR and FATCA reporting as well. This article addresses both the reporting and income recognition issues that arise from the change.
1. Understanding the Suspension of the U.S.–Russia Tax Convention
In August 2023, the U.S. Treasury announced that it was suspending all provisions of the 1992 U.S.–Russia Tax Treaty, citing national security concerns. This suspension effectively removed all bilateral protections, including relief from double taxation, reduction of withholding tax rates, and source-country exemptions for pension and retirement income. As a result, U.S. citizens and residents must now apply domestic U.S. tax law to Russian income, without treaty relief.
2. Taxation of Russian Pension Income
A. Taxable under U.S. Law
Under IRC §61(a)(11) and §72, pension and annuity income is includible in gross income when received. Without treaty protection, Russian pensions are fully taxable to U.S. persons in the year of receipt. Even if the pension is based on years of service performed in Russia, the income is treated as foreign-source but still taxable under U.S. law. The taxpayer may, however, claim a foreign tax credit (Form 1116) for any Russian income taxes withheld on those payments (if any).
B. Timing of Income Recognition
U.S. taxpayers generally report income when it is constructively received—when the pension amount is credited, available, or deposited into the recipient’s account. If the pension is paid into a Russian bank account, the income is recognized in that year, even if not transferred to the United States. If the taxpayer accrues a right to future payment but receives no current distribution, there is no income recognition until payment is made.
C. Prior-Year Returns
For returns filed before the treaty suspension, taxpayers who excluded Russian pensions under Article 17 likely filed correctly at that time. However, for 2024 and subsequent years, the exclusion no longer applies. If a 2024 return was filed without including the Russian pension, it should be amended (Form 1040-X) to include the omitted income.
3. FBAR and FATCA Implications
The suspension of the treaty does not directly affect FBAR filing obligations, but it heightens the risk of non-compliance for those with Russian pension accounts or bank accounts used to receive pension payments.
A. When Is a Russian Pension a Foreign Financial Account?
- State Pension (ПФР): Not reportable — similar to U.S. Social Security.
- Employer or Private Pension: Reportable — maintained at a foreign financial institution.
- Pension paid to a personal Russian bank account: Reportable — the bank account itself is FBAR-reportable.
B. Valuing the Account
If the pension is held in a segregated account or if payments are credited to a foreign bank, the maximum value during the year must be reported on the FBAR. When no account balance is shown, taxpayers may estimate the value using actuarial present-value methods consistent with IRM 4.26.16.3.6.1.3.
Example Calculation:
- Average salary: 1,800,000 RUB
- Years of service: 30
- Pension formula: 1.5% × years × average salary = 810,000 RUB annual benefit
- Present value (5% discount, 20-year payout): ≈ 7,905,600 RUB
- U.S. Treasury exchange rate ( 90 = $1): ≈ $87,840
This represents the estimated maximum account value for FBAR and FATCA reporting.
4. Reporting and Income Reconciliation
When reporting Russian pension income and accounts, the following forms typically apply: –
- FBAR (FinCEN 114): Report foreign financial accounts.
- Form 8938 (FATCA): Report specified foreign financial assets.
- Form 1040 / 1040-X: Report taxable pension income.
- Form 1116: Claim foreign tax credit for Russian taxes withheld.
5. Streamlined Compliance for Prior Omissions
Taxpayers who previously excluded or failed to report Russian pensions may qualify for the Streamlined Filing Compliance Procedures if the failure was non-willful. Under the Streamlined Domestic or Foreign Offshore Procedures, taxpayers can file six years of FBARs, amend three years of income tax returns, and provide a detailed reasonable cause statement explaining the omission and valuation method.
6. Practical Recommendations
1. Identify the pension type — state vs. private.
2. Confirm income inclusion for 2024 and beyond.
3. Review FBAR/FATCA obligations.
4. Document exchange rates and assumptions.
5. Consult a qualified tax attorney for offshore compliance.
Conclusion
The suspension of the U.S.–Russia Tax Treaty fundamentally changes how Russian pension income is treated for U.S. tax purposes. What was once exempt or deferred under treaty protection is now fully taxable. At the same time, certain Russian pension arrangements may trigger FBAR and FATCA reporting requirements. For U.S. taxpayers with Russian pensions or other assets abroad, 2024 marks a turning point. Proper reporting and valuation—supported by clear documentation—are essential to avoid unnecessary penalties or scrutiny.
Anthony N. Verni, Attorney at Law, CPA Verni Tax Law — Focused on IRS Practice, Offshore Compliance, and FBAR Defense
