I would put the engine back with no washers, using the built in thrust. Yes, you need to check the stablizer also. You can use a couple pieces of scrap wood and clamp them over the elevator and stablizer to make sure the elevator is centered when you check the incidence. If you are using the TE of an aileron when checking, you also have to make sure that is in a netural poition.

The pitch up when you cut throttle is to much down thrust. Remember that the datum line for incidence is a line from the center of the prop to the rear that is level when the plane is in level flight. Kind of hard to check in the air, so just eyeball the level and work from there. It is the relationship between engine down, wing and stablizer that is important. If you get the plane setup up and the wing shows -10 degrees, you can just adjust your other readings by the 10 and still get the relationship. It is less prone to math errors if you get the plane realy close to level though.

By the way, what do the plans show for incidence, I pulled the manual off ToPFlights site and they don't mention it that I could find.

added: For comparison, the 4*60 shows 2 degrees down on the engine, +1/2 degree on the wing and the stab at 0

Don