Schedule 1 (Form 1040), officially titled “Additional Income and Adjustments to Income,” serves as a crucial supplementary form for the U.S. federal income tax return. This document is designed to work alongside the main Form 1040, providing a detailed breakdown of various income types and adjustments that do not have dedicated lines on the streamlined primary form. The introduction of Schedule 1 was part of the Tax Cuts and Jobs Act of 2017, which aimed to simplify the tax filing process for individuals. By segregating these additional items onto a separate form, the Internal Revenue Service (IRS) maintains a cleaner and more straightforward main Form 1040 while still allowing taxpayers to report all necessary financial information accurately.
The primary purpose of Schedule 1 is to capture a wide range of income sources beyond standard wages and salaries. This includes business income, rental income, unemployment compensation, and other less common income streams. Additionally, it serves as the vehicle for reporting above-the-line deductions, such as student loan interest and self-employment tax contributions. The form is not required for every taxpayer; it is specifically for those whose financial circumstances extend beyond the basics. For instance, individuals who are freelancers, landlords, or teachers claiming classroom expense deductions may need to file this form. Conversely, if an individual’s income consists solely of wages, interest, dividends, retirement income, Social Security benefits, or capital gains or losses, Schedule 1 is likely unnecessary.
Who Needs to File Schedule 1?
Schedule 1 must be completed by individuals who have additional income or adjustments that are not listed on the main Form 1040. The form is divided into two main parts: Part I for Additional Income and Part II for Adjustments to Income. Taxpayers must evaluate their financial situation to determine if they fall into these categories.
In Part I, individuals report various types of supplemental income. This includes taxable refunds of state and local income taxes, alimony received, income or loss from a business, rental real estate income, royalties, farm income, and unemployment compensation. Other specific income sources that require reporting on Schedule 1 include gambling winnings, cancellation of debt, Alaska Permanent Fund dividends, and jury duty pay. For many of these income types, the taxpayer must also attach additional schedules or forms to the return, such as Schedule C for business income, Schedule E for rental income, or Schedule F for farm income.
Part II of Schedule 1 is dedicated to adjustments to income, often referred to as "above-the-line" deductions. These adjustments reduce the taxpayer’s adjusted gross income (AGI), which can lower the overall taxable income. Common adjustments include contributions to health savings accounts (HSAs), the deductible part of self-employment taxes, contributions to SEP or SIMPLE retirement plans, health insurance premiums for self-employed individuals, penalties on early withdrawals of savings, and IRA contribution deductions. Specific professions, such as military reservists, performing artists, and fee-based government officials, may also claim unreimbursed business expenses. Educators working in schools can claim up to $300 in 2025 for unreimbursed expenses. Additionally, deductions for student loan interest are capped at $2,500.
It is important to note that some adjustments, such as alimony payments, are only applicable for divorce agreements dated before December 31, 2018. The eligibility for these adjustments depends on the specific circumstances and dates of agreements, so taxpayers should carefully review IRS instructions to determine applicability.
Recent Updates and Changes to Schedule 1
Schedule 1 has undergone updates to reflect changes in tax law and reporting requirements. Beginning in 2024, the form was revised to accommodate lower reporting thresholds for Form 1099-K. This update introduced a new section to simplify the entry of amounts that do not affect taxable income. These include amounts reported on a 1099-K in error, such as personal money transfers, and the sale of personal items at a loss, which are neither taxable nor deductible.
Another significant update for 2024 is the introduction of line 8v in Section 1 for reporting digital assets received as ordinary income that are not reported elsewhere on the tax return. This reflects the growing prevalence of digital currencies and assets in everyday transactions.
Additionally, the "One Big Beautiful Bill" has made permanent extensions to tax cuts from the Tax Cuts and Jobs Act. This legislation increases the cap on the amount of state and local or sales tax and property tax (SALT) that can be deducted. It also makes cuts to energy credits under the Inflation Reduction Act, changes taxes on tips and overtime for certain workers, reforms Medicaid, increases the debt ceiling, and reforms Pell Grants and student loans. These changes may indirectly affect the income and adjustments reported on Schedule 1, particularly for those claiming SALT deductions or affected by energy credit modifications.
How to Complete Schedule 1
Completing Schedule 1 requires careful attention to detail and adherence to IRS guidelines. The process begins with ensuring that the form is necessary based on the taxpayer’s income and adjustments. If only standard income sources are present, the form can be skipped. However, if additional income or adjustments apply, the taxpayer must proceed with the following steps.
First, the taxpayer must enter their full name and Social Security Number exactly as they appear on the main Form 1040. This ensures consistency across all documents submitted to the IRS.
In Part I, Additional Income, each line corresponds to a specific income type: - Line 1: Taxable refunds, credits, or offsets of state and local income taxes. Enter any taxable state or local tax refunds received. - Line 2a: Alimony received. Enter the amount of alimony received. - Line 2b: Date of original divorce or separation agreement. Follow IRS instructions to determine if this applies. - Line 3: Business income or loss. Attach Schedule C and enter the result here. - Line 4: Other gains or losses. Attach Form 4797 and enter the result here. - Line 5: Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E and enter the result here. - Line 6: Farm income or loss. Attach Schedule F and enter the result here. - Line 7: Unemployment compensation. Enter the total amount received. - Line 8: Other income. This includes various specific types: - 8a: Net operating loss (enter in parentheses if it’s a loss). - 8b: Gambling winnings. - 8c: Cancellation of debt. - 8d: Foreign earned income exclusion from Form 2555 (enter excluded amount in parentheses). - 8e: Income from Form 8853. - 8f: Income from Form 8889. - 8g: Alaska Permanent Fund dividends. - 8h: Jury duty pay. - 8v: Digital assets received as ordinary income (for 2024 and later).
After listing all additional income, the total from Part I is transferred to line 8 of Form 1040.
In Part II, Adjustments to Income, taxpayers list deductions that reduce AGI. Key lines include: - Educator expenses (up to $300 in 2025). - Unreimbursed business expenses for specific professions (military reservists, performing artists, fee-based government officials). - Health savings account (HSA) contributions. - Moving expenses for Armed Forces members. - Deductible part of self-employment taxes. - Contributions to SEP, SIMPLE, or qualified retirement plans. - Health insurance premiums for self-employed individuals. - Penalties on early withdrawals of savings. - Alimony payments (for agreements dated before December 31, 2018). - IRA contribution deduction. - Student loan interest deduction (up to $2,500).
The total from Part II is transferred to line 10 of Form 1040. It is essential to attach all required forms and schedules, such as Schedule C, E, or F, to the tax return.
Important Considerations for Taxpayers
Taxpayers should be aware that Schedule 1 is not a standalone form; it must be filed with Form 1040. The due date for Schedule 1 aligns with the main tax return, typically April 15th each year. For the 2025 tax year, the due date remains April 15th, unless extended by other provisions.
When completing Schedule 1, accuracy is paramount. Errors in reporting additional income or adjustments can lead to delays in processing or potential audits. Taxpayers should retain all supporting documentation, such as 1099 forms, business ledgers, and receipts for deductible expenses, for at least three years after filing.
The updates to Schedule 1 in 2024, particularly regarding digital assets and 1099-K reporting, require additional attention. Taxpayers dealing with cryptocurrencies or online payment platforms must ensure they correctly report non-taxable transfers and losses to avoid confusion.
Furthermore, the permanent extension of tax cuts and changes to SALT deductions may benefit some taxpayers, but it also necessitates a review of itemized deductions versus the standard deduction. While Schedule 1 does not directly handle the SALT cap increase, it interacts with the overall tax calculation on Form 1040.
Conclusion
Schedule 1 (Form 1040) is an essential tool for accurately reporting additional income and adjustments to income that are not captured on the main Form 1040. It simplifies the primary tax form while accommodating a wide range of financial situations, from freelance earnings to educator expenses. Recent updates, including provisions for digital assets and revised 1099-K thresholds, reflect the evolving nature of income sources in the modern economy. Taxpayers with income beyond wages, interest, dividends, retirement income, Social Security benefits, or capital gains must evaluate whether Schedule 1 applies to their situation. By carefully following IRS instructions and ensuring all required attachments are included, individuals can meet their tax obligations efficiently and accurately.