Thanks for all the helpful advice. It all makes sense now after I started reading pub 54. The IRS makes it clear at the very beginning, under the "reminders" section that"you must figure the tax on your nonexcluded income using the tax rates that would have applied had you not claimed the exclusions." I had mistakenly assumed that "excluded" meant "no impact on taxes" rather than "we will tax your remaining income at a higher rate."
Turns out this is not a turbo tax issue but an IRS policy that is stated upfront. However, it would be nice if they changed the name to The Overseas Moolah Toll so that you know you will end up paying extra regardless.
