What you're missing is that, when you claim the foreign earned income exclusion, the excluded foreign income can increase the tax on your other income, that is not excluded. Your other income is taxed at the same rates that would have applied to that income if you did not get the exclusion. The non-excluded income is "stacked" on top of the excluded income for the purpose of calculating the tax. Therefore, when you enter foreign income and use the exclusion, some of your other income gets pushed into a higher tax bracket, and is taxed at a higher percentage. That's why your tax increases even though the foreign income itself is not taxed.
To perform this stacking of income the tax calculation has to be done on the Foreign Earned Income Tax Worksheet. You can look at this worksheet in forms mode in TurboTax. Basically the calculation is three steps.
1. Calculate what the tax would be if you did not have the exclusion. That is, add the excluded amount to your taxable income and calculate the tax on the total. (Income on worksheet Part I, lines 1 - 3, tax on line 4)
2. Calculate what the tax would be on the excluded amount only, if that were your only income. (Worksheet line 5)
3. Subtract the result of step 2 from the result of step 1. (Worksheet line 6)
