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.