Schedule 1 (Form 1040): Additional Income and Adjustments

Schedule 1 of Form 1040 is the attachment you file with your federal return to report income that doesn’t appear on the main 1040 income lines and to claim adjustments that reduce your adjusted gross income. Part I captures additional income like self-employment earnings, unemployment, and gambling winnings. Part II captures above-the-line deductions like student loan interest, health savings account contributions, and the self-employed health insurance deduction. If your only income is W-2 wages and bank interest, and you have no adjustments to claim, you can skip it.¹

Who Needs to File Schedule 1

You need Schedule 1 anytime your tax picture goes beyond straightforward wages and investment income. Common triggers include unemployment compensation, prize or award money, gambling winnings, self-employment income, canceled debt, and deductions such as student loan interest, the self-employment tax write-off, HSA contributions, or educator expenses.¹

The finished form feeds two numbers into your 1040. Total additional income from Part I lands on Form 1040, Line 8. Total adjustments from Part II land on Line 10.² Those two figures shape your adjusted gross income, which then determines whether you qualify for dozens of credits and deductions with income phase-outs. Getting them wrong cascades through the rest of the return.

Additional Income Reported in Part I

Part I collects income the IRS already expects to see through information returns filed by employers, states, casinos, and lenders. Skipping a category the IRS has a matching document for is a fast way to trigger a notice.

Business and Self-Employment Income

If you freelance, run a side business, or work as an independent contractor, your net profit or loss from Schedule C flows to Schedule 1, Line 3.³ Only the bottom-line number transfers; you calculate gross receipts minus expenses on Schedule C first. Farm income from Schedule F and rental or royalty income from Schedule E follow the same pattern on their own lines.

Unemployment Compensation

Unemployment benefits are taxable under federal law.⁴ Your state workforce agency or the IRS issues Form 1099-G showing what you received and any federal tax withheld.⁵ Some states only post the 1099-G to their unemployment portal, so check online if nothing arrives by mail. The total goes on Line 7.

Gambling Winnings

All gambling income is taxable, including winnings from casinos, lotteries, sports betting, raffles, and horse races. Report the full amount even when the payer didn’t issue a Form W-2G.⁶ Non-cash prizes like cars and trips count at fair market value. Winnings go on Line 8b. You can offset winnings with losses only if you itemize on Schedule A, and only up to the amount you won.

Alimony Received

Alimony from a divorce or separation agreement finalized before 2019 is taxable to the recipient and goes on Line 2a.⁷ Agreements executed on or after January 1, 2019, flipped the rules: the recipient no longer reports it as income, and the payer no longer deducts it. If a pre-2019 agreement was later modified and the modification specifically adopts the new tax treatment, the new rules apply.

State and Local Tax Refunds

A state or local income tax refund is taxable only if you itemized deductions in the year you overpaid. If you took the standard deduction that year, the refund isn’t reported. When it is taxable, the amount comes from Form 1099-G and goes on Line 1.

Canceled Debt

When a lender forgives or settles a debt for less than what you owed, the forgiven amount is generally ordinary income.⁸ Credit card settlements, forgiven personal loans, and short sales on property can all create this income, reported on Line 8c. The lender usually sends Form 1099-C.

Several exclusions exist. Debt discharged in a Title 11 bankruptcy case is excluded, as is debt canceled while you were insolvent (liabilities exceeding assets). Qualified farm debt and qualified real property business debt also qualify. Using any of these exclusions requires filing Form 982.⁸

Two popular exclusions have sunset dates worth flagging. The temporary exclusion for most student loan discharges expired at the end of 2025, so student loan forgiveness in 2026 is generally taxable again. The exclusion for canceled qualified principal residence debt (up to $750,000) also expired for discharges after December 31, 2025, unless a written arrangement was in place before that date. Legislation to extend the mortgage debt exclusion has been introduced in Congress but had not been enacted at the time of writing.

Prizes, Awards, and Jury Duty Pay

Contest winnings, sweepstakes prizes, and other awards go on Line 8i. Jury duty pay goes on Line 8h.³ If your employer kept paying your salary during jury service and required you to hand over the jury check, you still report the jury pay as income on Line 8h and then claim a matching adjustment on Part II, Line 24a, so it washes out.

Digital Asset Income

Cryptocurrency or other digital assets received through mining, staking, or an airdrop related to a hard fork go on Line 8v.⁹ The IRS treats digital assets as property, and you report the fair market value in U.S. dollars at the time you received them. Every federal return now includes a yes-or-no question asking whether you received, sold, or exchanged digital assets during the year, and you must answer it.

Not all digital asset activity belongs on Schedule 1. Sales of crypto held as a capital asset go on Form 8949 and Schedule D. Pay received as an independent contractor in crypto goes on Schedule C. Line 8v is specifically for ordinary income from mining, staking, and similar activities that isn’t reported elsewhere on the return.⁹

Adjustments to Income in Part II

Part II is where most filers get their real benefit from Schedule 1. These above-the-line deductions reduce your adjusted gross income directly, and you can claim them whether you itemize or take the standard deduction.¹⁰ A lower AGI can also unlock credits and deductions with income phase-outs, so these adjustments often have a multiplier effect.

Educator Expenses

Eligible K-12 teachers, counselors, principals, and aides who work at least 900 hours during the school year can deduct up to $300 in unreimbursed classroom expenses, including books, supplies, computer equipment, and professional development. Married couples filing jointly where both spouses qualify can deduct up to $600 total, capped at $300 each.¹¹

Health Savings Account Contributions

With a high-deductible health plan, contributions to an HSA are deductible on Schedule 1. For 2026, the maximum is $4,400 for self-only coverage and $8,750 for family coverage, plus an additional $1,000 catch-up at age 55 or older.¹² Contributions your employer makes on your behalf don’t count toward your deduction because they were never included in your income to begin with.

Traditional IRA Contributions

You can deduct traditional IRA contributions up to $7,500 for 2026, plus $1,100 more at age 50 or older.¹³ Whether you can deduct the full amount depends on your income and whether you or your spouse participate in a workplace retirement plan. For 2026, single filers covered by a workplace plan see the deduction phase out between $81,000 and $91,000 of modified AGI. For married couples filing jointly where the contributing spouse has a workplace plan, the range is $129,000 to $149,000. If neither spouse has a workplace plan, the deduction is available at any income level.

Student Loan Interest

You can deduct up to $2,500 in interest paid on qualified student loans during the year.¹⁴ Your lender sends Form 1098-E showing the interest they received.¹⁵ For 2026, the full deduction is available to single filers with modified AGI of $85,000 or less, phasing out completely at $100,000. For joint filers, the range is $175,000 to $205,000. Income above the upper threshold means no deduction here.

Alimony Paid

If you pay alimony under a pre-2019 agreement, you can deduct those payments. The payment must be in cash (checks and money orders count), you and your ex cannot file a joint return together, and there can be no liability to continue payments after the recipient’s death.⁷ You must enter the recipient’s Social Security number or ITIN on your return. Skipping that risks losing the deduction plus a $50 penalty.

Military Moving Expenses

Active-duty members of the Armed Forces can deduct unreimbursed moving expenses tied to a permanent change of station, covering the cost of moving household goods, travel, and lodging on the way to a new post.¹⁶ This deduction is no longer available to civilians.

Adjustments Only Self-Employed Filers Can Claim

Self-employment triggers several adjustments that wage earners don’t get. Missing them is one of the more common ways people overpay their taxes.

Deductible Portion of Self-Employment Tax

Self-employed filers pay both the employer and employee shares of Social Security and Medicare taxes. The tax code lets you deduct the employer-equivalent portion (roughly half your self-employment tax bill) as an adjustment to income. The deduction reduces income tax, not the self-employment tax itself.¹⁷

Self-Employed Health Insurance

If you’re self-employed with a net profit, you can generally deduct premiums paid for health, dental, and long-term care insurance for yourself, your spouse, and your dependents. The deduction is calculated on Form 7206, and the result flows to Schedule 1.¹⁸ It can’t exceed net self-employment income, and it’s disallowed for any month you were eligible to participate in an employer-subsidized health plan, including through a spouse’s employer.¹⁹ Partners and S-corporation shareholders who own more than 2% of the company can also qualify, but the plan must be established under the business.

Retirement Plan Contributions

Self-employed filers have access to retirement plans with contribution limits far above a traditional IRA. For 2026, SEP-IRA contributions are capped at the lesser of 25% of compensation or $72,000.²⁰ SIMPLE IRA plans allow employee salary deferrals of up to $17,000, with a $4,000 catch-up at age 50 and older and a $5,250 catch-up at ages 60 through 63.²¹ These contributions are reported as adjustments on Schedule 1.

Documents to Gather Before Filing

The specific paperwork depends on which lines apply to you. Common documents include:

Form 1099-G for unemployment compensation and state or local tax refunds⁵
Form 1098-E for student loan interest paid to your lender¹⁵
Form W-2G for gambling winnings above reporting thresholds
Form 1099-C for canceled debt of $600 or more
Form 1099-NEC or 1099-MISC for self-employment and other miscellaneous income
Your completed Schedule C, E, or F for business, rental, or farm income that feeds into Schedule 1

If you report business income or claim business-related adjustments, keep supporting receipts, invoices, bank statements, and canceled checks. The IRS requires these to be available for inspection.²² Hold them at least three years after filing, or six years if you underreported income by more than 25%. Records for business property should be kept until the statute of limitations expires for the year you sell or dispose of the asset.

How the Totals Flow Into Form 1040

Each entry goes on a specific numbered line. After filling in all applicable income items in Part I, you total them on Line 10, and that figure transfers to Form 1040, Line 8. In Part II, you total your adjustments on Line 26, and that figure transfers to Form 1040, Line 10.³ The difference between those two numbers is what shifts your AGI up or down from your base 1040 income.

Tax software handles the math and the transfers automatically if you file electronically. On paper, place Schedule 1 directly behind Form 1040 and any lettered schedules, in numerical order. Electronic filers typically receive acknowledgment within 24 to 48 hours; paper filers should expect a longer processing timeline. The form and its instructions are available on irs.gov or through any IRS-authorized tax preparation platform.³

Penalties for Missing Income

The IRS matches every Schedule 1 entry against information returns filed by employers, banks, state agencies, and casinos. When the numbers don’t line up, a notice follows. The accuracy-related penalty for negligence or substantial understatement is 20% of the underpaid tax.²³ If the IRS determines the underreporting was intentional, the civil fraud penalty is 75% of the portion of the underpayment attributable to fraud.²⁴ Forgetting a 1099-G or a W-2G you received is exactly the kind of mismatch that triggers automated notices, so it’s worth confirming you’ve accounted for every information return before you file.

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Internal Revenue Service. About Form 1040, U.S. Individual Income Tax Return
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Internal Revenue Service. Form 1040 – U.S. Individual Income Tax Return
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Internal Revenue Service. Schedule 1 (Form 1040) – Additional Income and Adjustments to Income
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Office of the Law Revision Counsel. 26 USC 85 – Unemployment Compensation
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Internal Revenue Service. What If I Receive Unemployment Compensation
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Internal Revenue Service. Topic No. 419, Gambling Income and Losses
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Internal Revenue Service. Topic No. 452, Alimony and Separate Maintenance
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Internal Revenue Service. Topic No. 431, Canceled Debt – Is It Taxable or Not?
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Internal Revenue Service. Digital Assets
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Office of the Law Revision Counsel. 26 USC 62 – Adjusted Gross Income Defined
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Internal Revenue Service. Topic No. 458, Educator Expense Deduction
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Congress.gov. Health Savings Accounts (HSAs)
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Office of the Law Revision Counsel. 26 USC 219 – Retirement Savings
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Office of the Law Revision Counsel. 26 USC 221 – Interest on Education Loans
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Internal Revenue Service. Form 1098-E – Student Loan Interest Statement
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Internal Revenue Service. Topic No. 455, Moving Expenses for Members of the Armed Forces and the Intelligence Community
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Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
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Internal Revenue Service. About Form 7206, Self-Employed Health Insurance Deduction
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Internal Revenue Service. Instructions for Form 7206
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Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)
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Internal Revenue Service. Retirement Topics – SIMPLE IRA Contribution Limits
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Internal Revenue Service. Publication 583, Starting a Business and Keeping Records
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Internal Revenue Service. Accuracy-Related Penalty
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Office of the Law Revision Counsel. 26 USC 6663 – Imposition of Fraud Penalty