My Foreign Earned Income is marked as exempted via TurboTax, but my Federal Tax Due went up from it. Did I enter numbers wrong somewhere, or is this to be expected?

[travisbrown077]

Living in Japan as a foreign national, where I should be exempted from Japanese taxes and have my US tax payments deferred for two years unless I return home via tax treaty.

[SweetieJean]

Is your income higher than the maximum allowed for the exclusion?

[SweetieJean · Accepted solution]

Although your foreign income is exempted from tax, the amount of it is used to determine the tax rate that you pay on your non foreign income. So adding your foreign, excluded, income makes the tax rate on your non-exempted income go up, and your refund goes down.

The taxes on your taxable income are determined considering excluded income as well. Although not taxed, the excluded income pushes your other income into a higher tax bracket.