Understanding additional income and adjustments to income for 2021
Updated December 20, 20219 min read
Table of contents
Schedule 1 is a tax form that you need to attach to your federal tax return — IRS Form 1040 — if you have certain types of income or if you have certain expenses that the federal government allows you to exclude from your taxable income. This all helps you find your adjusted gross income (AGI), which is necessary for finding how much federal income tax you actually have to pay.
Schedule 1 is where you report all your income that wasn’t from bank interest, investment dividends, or wages reported on a W-2 from your employer.
The “adjustments to income” section helps you find your AGI, which determines eligibility for other deductions.
You can take the deductions on Schedule 1 regardless of whether you take the standard deduction or itemized deductions.
Schedule 1 was created in the 2017 tax reform; its contents used to be directly on Form 1040.
Form 1040 Schedule 1, usually referred to as just Schedule 1, is an IRS tax form that allows taxpayers to do two things: identify earned income that wasn’t than wages, salaries, interest, and dividends; claim deductions for certain eligible expenses.
Schedule 1 has two parts. The first part of Schedule 1 looks at additional income, which is all income that isn’t bank interest, investment dividends, or wages reported on a W-2 form. (These three types of income are written directly on Form 1040.) Common examples of additional income are business income, rental income, and unemployment compensation.
The rest of the form looks at adjustments to income. An adjustment is money you spent during the year that the federal government allows you to exclude from your taxable income. Some adjustments are called tax deductions, like the student loan interest deduction. Others just consider specific expenses, like alimony payments.
Schedule 1 isn’t necessary for all tax filers, but many people will need it. There are two reasons why you might use Schedule 1:
You have income that isn’t reported directly on Form 1040.
You have one of the 12 types of expenses that the federal government allows you to exclude from your taxable income. These are called adjustments to income.
Learn more about how to file your taxes with our complete guide to tax filing.
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Income that doesn't get reported directly on your Form 1040 will generally go on Schedule 1. Form 1040 only includes salaries and wages reported to you on a W-2 form, bank interest reported to you on a Form 1099-INT, and investment dividends reported to you on Form 1099-DIV.
Schedule 1 allows you to report the following types of income:
Tax refunds and credits for state and local income taxes
Alimony you received, if the alimony agreement took effect before 2019
Business income (or loss)
Gains (or losses) from the sale or trade of business property, including real estate
Rental income, royalty payments, trust income, and income from a partnership or S corporation
Miscellaneous income such as awards, cancelled debts, or dividends from a whole life insurance policy if they exceed the premiums you paid for the policy
The federal government lets taxpayers exclude 12 types of expenses by using Schedule 1:
Educator expenses worth up to $250, including protective equipment for COVID-19
Business expenses for fee-basis government officials, performing artists, and reservists (members of the military reserve forces) who traveled more than 100 miles to perform reserve services
Health savings account (HSA) contributions you made with post-tax money
Moving expenses for active duty members of the U.S. Armed Forces
Half of the self-employment tax, if you had self-employment income
Retirement account contributions for the self-employed and small business owners
The cost of health insurance premiums (including dental and long-term care insurance) for self-employed workers
Penalties for the early withdrawal of savings, like in a certificate of deposit (CD)
Alimony you paid, if the alimony agreement took effect before 2019
Contributions to a traditional IRA, if made with money you already paid tax on
Interest on student loans, up to $2,500
Tuition and fee expenses for you, a spouse, or a dependent
The amount you spent on these expenses is used to reduce how much of your gross income (total annual income) is actually subject to income tax. As an example, let’s say you have $75,000 of total income and $4,000 of income adjustments. The income you need to pay federal tax on is now $71,000. This value is also your adjusted gross income, or AGI, which is then used to determine your eligibility for a few other deductions.
When you fill out Schedule 1 with the rest of your tax return in early 2022, you’ll start by writing your name and Social Security number (SSN). Make sure to write your name the exact same as on your Form 1040. If you’re filing jointly, write both of your names and SSNs in the same order as on your 1040.
The rest of Schedule 1 is divided into two parts. Part 1 that covers income you earned but didn’t already report on your 1040. Part 2 covers deductible expenses, called adjustments to income.
Part 1 of Schedule 1 covers a handful of additional income sources that the main Form 1040 doesn’t directly ask about.
Line 1 is where you write in the amount you earned from a tax refund, tax credit, or other offset for state and local income taxes. If you have this type of income, you probably received a 1099-G. There is a worksheet in the IRS instructions for Schedule 1 to help you determine how much income you need to report here. There are a few exceptions, which the instructions outline.
Line 2 has two parts. Line 2a is for alimony or separate maintenance payments that you received. On line 2b, write the date that you entered into the payment agreement. Because of changes from the Tax Cuts and Jobs Act of 2017, alimony is not considered if it’s from an agreement you created after 2018.
Line 3 is where you write any business income or loss you had during the tax year. You also need to attach Schedule C.
Line 4 asks about other gains or losses, like for the sale or trade of business property, including real estate. Complete and attach Form 4797. If you have something to report on this line, your situation may also require other forms, like Schedule D.
Line 5 is for income you made from rental property, royalties, partnerships, S corporations, or trusts. You also need to complete and attach Schedule E.
Line 6 is for farm income. Attach Schedule F as well.
Line 7 is for reporting any unemployment insurance you received. You should have also received a Form 1099-G, with box 1 showing the total unemployment compensation you received during the year. Remember that unemployment benefits are taxable.
Line 8 is for miscellaneous untaxed income you earned but did not report anywhere else on your tax return. Line 8 is split out into lines 8a through 8p, plus 8z for any income not listed. Income to include on line 8 includes gambling winnings, prizes, awards, cancellations of debt, jury duty pay, Alaska Permanent Fund dividends, and taxable distributions from an ABLE account. Do not report any self-employment income on this line.
Line 9 asks you to add up the values from all of your line 8 income, and then line 10 asks you to add up all the previous lines (lines 1 through 7 and line 9). This final sum also goes on line 8 of your 1040.
Part 2 of Schedule 1 covers any adjustments to your income. An adjustment is money you spent during the year that the federal government doesn’t actually require you to pay tax on. The amount you spent on these expenses reduces your taxable income for the year. Adjustments are only available for specific types of expenses, like student loan interest.
Line 11 allows you to report educator expenses you paid during the year, up to $250. This can include books, classroom supplies, computer equipment, or other materials you paid for out of pocket. For 2021, supplies and personal protective equipment (PPE) for COVID-19 qualify as educator expenses, so you can report them here when you file your tax returns in 2022. Also include the cost of professional development courses you took, if they were related to the curriculum you teach.
Line 12 is for business expenses you had if you were a government official paid on a fee basis, a performing artist, or a reservist (a member of the military reserve forces) who traveled more than 100 miles from your home to perform reserve services. You need to attach Form 2106, which further explains how to determine which of your expenses qualify.
Line 13 is for the health savings account deduction, or HSA deduction. You can make the HSA deduction if you made contributions to an HSA outside of employer contributions, rollovers from other health accounts, and some contributions from a retirement account. You also need to complete Form 8889.
Line 14 is for any moving expenses you incurred if you are a member of the U.S. Armed Forces on active duty, and you had a permanent change of station due to a military order. You must also complete and attach Form 3903.
Line 15 allows for self-employed individuals to deduct half of the self-employment tax. You also need to attach Schedule SE.
Line 16 allows self-employed individuals and small business owners to deduct the amount they paid into a self-employed SEP IRA, SIMPLE IRA, or another qualified plan for retirement. IRS Publication 560 details qualified retirement plans. (Ministers and religious workers should look to IRS Publication 517 instead.)
Line 17 is for the self-employed health insurance deduction. Self-employed individuals may be able to deduct 100% of health, dental, and long-term care insurance premiums that they paid for themselves, their spouses, their dependents, and any nondependent children aged 26 or younger at the end of 2021. See how much you can deduct by using the worksheet in the Self-Employed Health Insurance Deduction Worksheet, in the Schedule 1 instructions.
Line 18 asks you to write in any penalty you owe for the early withdrawal of savings. A common example is early withdrawal penalties for a CD (maybe consider a no-penalty CD). Penalties you can include on line 18 will be reported to you on a Form 1099-INT or Form 1099-OID.
Line 19 allows you to exclude alimony payments you made, as long as the divorce agreement took effect in 2018 or earlier. There are three parts to this line. Line 19a is for the amount of alimony you paid; line 19b is for the SSN of the payment recipient; and line 19c is for the date that your divorce agreement took effect.
Line 20 allows you to deduct contributions you made to a traditional IRA, as long as you made it with money you already paid income tax on. A traditional IRA allows you to save money without paying income tax until you withdraw the money, so this deduction pays you back for the income taxes you already paid on your contribution. If a contribution goes straight from your paycheck into your IRA without you ever paying tax on it, you cannot deduct it here. (A Roth IRA contribution isn’t included here because Roth IRAs always require you to pay income tax first.)
Line 21 is for the student loan interest deduction, which allows you to deduct the amount of interest you paid on student loans, up to $2,500. There are income limits, based on your filing status.
Line 22 is empty.
Line 23 is for the Archer MSA deduction, which gives self-employed individuals and small business employees the ability to deduct health care costs if they’re covered by a high-deductible health plan (HDHP). Also complete Form 8853.
Line 24 gives you space to tally any other adjustments to income. The more common adjustments — like deductible jury duty pay and the foreign housing deduction — are listed on lines 24a through 24k. There is also a line 24z where you can list and explain other adjustments you want to claim.
Line 25 provides you a space to add up the values from all of your line 24 adjustments.
Line 26 asks you to add up the previous lines (lines 11 through 24 plus line 25). This final sum is your total adjustments to income for 2021 and will also go on line 10a of your Form 1040.
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