This is a super complex area of the tax code. I highly recommend that you seek not just volunteer advice from an Internet forum, but rather professional advice from a CPA/enrolled agent/tax lawyer who does with foreign taxes every day (not once in a blue moon).
That said here are some thoughts to help you when you approach such a professional.
I think you probably need to not do a negative adjustment but go through the whole FTC/1116 process. That's because the mechanism the US tax code uses to implement credits for foreign taxes paid is via Code Section 901 -- https://www.law.cornell.edu/uscode/text/26/901
The fact that the IRS hasn't noticed means almost nothing. They are very good at noticing unreported income from W2s/1099s, but something like this is harder for them to spot and question. They might or might not ever notice it. Or they could notice tomorrow and ask you to support your adjustment.
There may be exceptions that require a negative adjustment because they aren't covered by 901, but that is not normally the case.
The reason a negative adjustment may not be right is that the scheme created by I.R.C. 901 and 1116/FTC involves (among many other things) limiting your credit as follows and that wouldn't show up in a negative adjustment. The US FTC is limited to US tax times foreign income (of the type involved) divided worldwide income. So there are plenty of ways not get the full foreign tax paid back. That is especially true if your foreign income is a small fraction of your US income or if the US tax on the income is much less than the foreign tax (usually the case). Also each type of foreign income is calculated differently.
Your question about the foreign income being "tax free" but pushing up your foreign bracket is a very sophisticated and subtle question. I'm not sure you will find a clear answer. If I were you I would probably compute your foreign tax without the "tax free" income. Say that is 10k EUR. Then add in the "tax free income" and see what the real number is (with the tax bracket adjustment). Say 12.5k EUR. I would then consider that to be a 2.5k EUR tax on the "tax free" income. Not sure that is correct, but it feels right and feels quite defensible. If you read the details of the 1116 instructions you will find that there are a lot of common sense requirements to figure out the proportion of each time of income and general deductions vs. income type specific deductions. This feels similar.
Finally, note that "resourced by treaty" only applies if the treaty overrides a particular section of the tax code. For example capital gains by a US Citizen who lives overseas are considered by the tax code to be foreign gains. The treaty probably says the same thing, but because the code already says that, the treaty has not
"resourced" the income. See I.R.C. 865(a) - https://www.law.cornell.edu/uscode/text/26/865
Other tax code rules are found in nearby sections: -- https://www.law.cornell.edu/uscode/text/26/subtitle-A/chapter-1/subchapter-N/part-I
again this is a very complicated area and professional advice would be a very good idea unless the amounts involved are small.
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