I currently live in Italy working at a international university. Under Italian law (Italian Law n. 476/1984 to be precise) my income is exempt from all Italian taxes, except for contributions to the national retirement plan. My income is quite reduced in comparison to non tax exempt employees under the assumptions that after taxes we make roughly equal amounts. We are effectively, "pre-taxed", to save the Italian government money.

I have lived in Italy long enough to qualify for the foreign earned income exclusion, which is larger than my entire income, under both tests. But do I need to declare this income at all? I understand that US citizens are taxed on their worldwide income, but wouldn't tax treaties protect my income from US taxation.

I have lived in Italy long enough to qualify for the foreign earned income exclusion, which is larger than my entire income, under both tests. But do I need to declare this income at all?=============Yes; even if the foreign earned income exclusion, which is larger than your entire income and no tax laiiblity to IRS/state, you need to declare your foreign source income on form 2555 in Part IV , All Taxpayers, for your FEIE credit on your US returns.

Also, aslongas you, as a U.S. person, own a foreign bank account, and the aggregate value of all foreign financial accounts exceeds $10K at any time during the calendar year, then you need to file a Form TD F 90-22 ,Report of Foreign Bank and Financial Authority (FBAR), by June 30, nest year. The FBAR is not an income tax return and should not be mailed with any income tax returns. The FBAR must be mailed on or before June 30 of the following year. Additionally, FEIE may not exceed your total tax liability in US for the taxable year.

I understand that US citizens are taxed on their worldwide income, ================>>>>>>>>Correct; as a US resident you need to report both US source and world wide source income that you earn during the year.

but wouldn't tax treaties protect my income from US taxation============>>>>>>>>Not from US taxation but form Italian taxation;Tax treaties offer a reduced rate of, or possibly a complete exemption from Italian income tax for you as a resident of US. After deductions/credits with Italian taxing authority, aslongas you still have taxable income that you earn in Italy, then you must pay tax on the foreign source income to IRS/ state.