Form 1040 Schedule 1

Understanding additional income and adjustments to income

Derek Silva

Derek Silva

Published January 28, 2020

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KEY TAKEAWAYS

  • 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

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 actualy have to pay.

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.

Who needs to use Schedule 1

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.

Income not reported on Form 1040

Income reported on the 1040 only includes salaries and wages reported to you on a W-2 form, bank interest reported to you on a Form 1099-INT or another interest form, and investment dividends reported to you on Form 1099-DIV or other dividend reporting form.

Schedule 1 allows you to report the following:

  • 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 loss) 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
  • Farm income
  • Unemployment benefits
  • 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

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Expenses used to adjust income

The federal government lets taxpayers exclude 12 types of expenses on Schedule 1:

  • Educator expenses on classroom supplies, up to $250
  • Business expenses for fee-basis government officials, performing artists, and reservists ( members of the military reserve forces) who travelled 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
  • 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 using money you already paid income 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 $45,000 of total income and $4,000 of income adjustments. The income you need to pay federal tax on is now $41,000. This value is also your adjusted gross income, or AGI, which is then used to determine your eligibility for a few other deductions. (After those deductions, you know how much income you actually have to pay income tax on.)

Learn more about how to file your taxes with our complete guide to tax filing.

How to fill out Schedule 1, line by line

At the top of Schedule 1 is a line for 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 your names and SSNs in the same order as on your 1040.

Next you need to check a box — yes or no — to indicate whether or not you sold, purchased, received, exchanged, or otherwise owned any virtual currency, like bitcoin, ether (Ethereum), or XRP (Ripple) during the year. If you select no, you can continue to the rest of the form. If you select yes, you may need to pay capital gains taxes.

(Read more about how to file taxes with cryptocurrency.)

The rest of Schedule 1 is divided into two parts, one that covers income you earned but didn’t already report on your 1040 and one that covers adjustments to income.

Part 1: additional income

Part 1 of Schedule 1 covers a handful of additional income sources that the 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 (which are within the main Form 1040 instructions) 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 in 2018 or earlier. 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 if you have anything to report on this line.

Line 4 asks about other gains or losses. This is any income or losses you had during the year for the sale or trade of business property, including real estate. You need to complete and attach Form 4797 as well. 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 if you report income on this line.

Line 6 is for farm income. Attach Schedule F as well.

Line 7 is for reporting any unemployment compensation you received. You should have also received a 1099-G, with box 1 showing the total unemployment compensation you received during the year.

Line 8 is for miscellaneous untaxed income you earned but did not report anywhere else on your tax return. There is also a line where you can write an explanation of what the income is. Examples may include gambling winnings, prizes, awards, or jury duty pay. This is where Alaskans can report their Alaska Permanent Fund dividends. Do not report any self-employment income on this line.

Add up the incomes from the previous lines and write the sum on line 9. This number also goes on line 7a of your 1040 (or 1040-SR).

Part 2: adjustments to income

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 (the amount of income used to calculate how much tax you owe). Adjustments are only available for specific types of expenses, like student loan interest.

Line 10 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. Also include the cost of professional development courses you took, if they were related to the curriculum you teach.

Line 11 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 travelled more than 100 miles from your home to perform reserve services. You need to Attach Form 2106 if you have expenses to report on this line. Form 2106 also further explains how to determine which of your expenses qualify.

Line 12 is for the health savings account deduction, or HSA deduction. You can make the HSA deduction if you made contributions to a health savings account outside of employer contributions, rollovers from other health accounts, and some contributions from a retirement account. You also need to complete Form 8889. (Learn how to set up an HSA.)

Line 13 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 14 allows for self-employed individuals to deduct half of the self-employment tax. You also need to attach Schedule SE.

Line 15 allows self-employed individuals and small business owners to deduct the amount they paid into a self-employed SEP IRA, a 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 16 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 2019. See you much you can deduct by using worksheet in the Schedule 1 instructions, Self-Employed Health Insurance Deduction Worksheet.

Line 17 is for writing 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 17 will be reported to you on a Form 1099-INT or Form 1099-OID.

Line 18 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 18a is for the amount of alimony you paid; line 18b is for the SSN of the payment recipient; and line 18c is for the date that your divorce agreement took effect. As with alimony income in the first part of this form, the tax law was recently changed to exclude alimony agreements from 2019 or later.

Line 19 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 Roths always require you to pay income tax first.)

Line 20 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 21 allows you to reduce your taxable income by the amount you spent on tuition and fees for you, a spouse, or a dependent. The amount you can deduct includes any amount you’ve paid for 2019 and the first three months of 2020. You will also need to fill out and attach Form 8917.

Line 22 asks you to add up lines 10 through 21. The sum is your total “adjustments to income” and you should also write this on line 8a of your Form 1040.

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