When you went through the routine in TurboTax where you apply for a credit for taxes paid to a foreign country, you had a choice between taking a credit against your taxes or deducting the foreign taxes against income. You must have chosen the deduction option, that is why you are getting an itemized deduction not a tax credit. You can correct that by going back through the foreign taxes section and changing your choice to the credit option.
As far at the treaty is concerned, more than likely it states you can exempt the foreign income from US taxation if you paid taxes on that income in the foreign country. To do that in TurboTax, you enter the income as you already have done, then you follow these instructions to enter a negative adjustment to income to cancel it out. If you do this, you shouldn't take the foreign tax credit or deduction, since you can't do that and exempt the income, you need to do one or the other.
- Choose the Federal option on your left menu bar
- Choose Wages & Income
- Find Less Common Income in the list of income sources
- Use the Show More option to expand the choices and choose Miscellaneous Income, 1099-A, 1099-C
- Choose the Other Reportable Income option and find Other Taxable Income in that section
- Enter a description for your treaty and the amount as a negative number
You need to include Form 8833 Treaty-Based Return Position Disclosure with your tax return. TurboTax does not support this form, so you will have to complete it separately and attach it to your tax return which you will have to file by mail.
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