@ali16 you report your total income ( from the income statement from your employer, including any housing assistance, cash assistance etc. etc. ), then when you fill out the form 2555 qualifying you for exclusion of the foreign income , it shows up as a negative number before your AGI is computed. Then on 1116 when you report the foreign taxes , you have to make sure that the foreign income is computed correctly to get the benefit of the foreign tax credit. TubroTax will walk you through the whole thing but you need to be able to check and make sure that things are right.
Also note that tax computation uses the world income to set the marginal rate correctly and then deletes the tax for the excluded amount and a similar thing happens for the tax credit for the non-excluded amount.
In my personal view, a desktop version s best for this kind of complicated situations because one gets access to the actual forms and the underlying worksheets.
