Get to know the authorBeing an expat, freelancer, or small business owner comes with plenty of perks—freedom, flexibility, and the ability to take charge of your lifestyle. But with those benefits comes the responsibility of navigating complex tax forms. One form that often trips people up is Schedule 1, an attachment to Form 1040. Whether you’re filing as a U.S. expat or managing self-employment income, Schedule 1 plays a key role in ensuring your taxes are accurate and complete.
But don’t worry—we’re here to break it all down. At Bright!Tax, we’ve helped countless Americans around the world navigate the intricacies of U.S. taxes. In this guide, we’ll walk you through what Schedule 1 is, who needs to file it, and how to make the most of the deductions and income adjustments it provides. By the end, you’ll feel confident tackling this critical piece of your tax return.
What Is IRS Form 1040 Schedule 1?
Schedule 1 is a supplementary form to the main Form 1040, used to report certain types of income and adjustments to income that don’t appear directly on the 1040 itself. Think of it as the IRS’s way of capturing the “extra details” about your finances—everything from self-employment deductions to unemployment income.
This form has two main sections:
- Part I: Additional Income
Report income that isn’t listed on your W-2, such as business income, rental income, unemployment compensation, or gambling winnings. - Part II: Adjustments to Income
Record income deductions (often called “above-the-line” deductions) that lower your taxable income, such as student loan interest, educator expenses, or contributions to a retirement plan.
Filing Schedule 1 accurately is essential for two reasons:
- It ensures that all your income is properly reported (to avoid IRS penalties).
- It allows you to claim deductions that directly reduce your taxable income, lowering your overall tax bill.
Who Needs to File Schedule 1?
Not everyone is required to file Schedule 1. You only need to attach it to your Form 1040 if you have income or deductions listed in one of its two sections. Here’s a closer look at the types of taxpayers who typically need to file:
Self-Employed Individuals
If you’re a freelancer, gig worker, or small business owner, you’ll use Schedule 1 to report self-employment income (via Schedule C). You’ll also deduct half of your self-employment tax on this form.
Expats with Foreign Income
U.S. expats may need to file Schedule 1 to report taxable distributions from foreign pension plans, rental income from property abroad, or alimony received.
Individuals With Unemployment Income
If you received unemployment benefits during the tax year, you’ll report them in Part I of Schedule 1.
Anyone Claiming Certain Adjustments to Income
If you’re eligible for adjustments to income—such as student loan interest, IRA contributions, or health savings account (HSA) contributions—you’ll use Part II to report them.
Breaking Down Schedule 1: Part I – Additional Income
The first part of Schedule 1 covers income that isn’t reported directly on Form 1040. This could include a wide range of income types, such as:
Business Income (or Loss)
Most small business owners, freelancers, and contractors report their income on Schedule C, but the final net earnings are carried over to Schedule 1.
Rental, Royalty, or Pass-Through Income
If you own rental properties, receive royalties, or have income from partnerships, S corporations, estates, or trusts, you will need to report these on Schedule E. This form is used to calculate and report the income or loss from such activities.
Unemployment Compensation
Unemployment benefits are taxable, and you’ll report them in this section. It’s important to note that foreign unemployment compensation received from another country is also subject to U.S. tax and must be reported similarly.
Other Income
This catch-all category includes things like:
- Gambling winnings
- Jury duty pay
- Hobby income
- Income from cancellation of debt
Example: Let’s say you’re an expat in Spain renting out your former U.S. residence. You’ll calculate your net rental income on Schedule E and report the result on Schedule 1.
Breaking Down Schedule 1: Part II – Adjustments to Income
Part II of Schedule I is where taxpayers can make adjustments to income, also known as “above-the-line” deductions. These deductions modify your adjusted gross income (AGI) potentially qualifying you for additional tax benefits dependent on lower AGI levels.
Here are some common deductions reported on Part II of Schedule 1:
Educator Expenses
If you’re an eligible teacher or educator, you can deduct up to $300 for classroom supplies purchased with your own money.
Student Loan Interest
You can deduct up to $2,500 of interest paid on student loans, as long as your income is below the eligibility limit. Note that this deduction begins to phase out at a certain income level.
Contributions to Retirement Plans
Self-employed individuals can deduct contributions to SEP IRAs, SIMPLE IRAs, or solo 401(k) plans for self-employed individuals. These deductions can significantly reduce your taxable income.
Health Savings Account (HSA) Contributions
If you have a high-deductible health plan, you can deduct contributions to an HSA, which offers triple tax benefits (tax-free contributions, growth, and withdrawals for medical expenses).
Self-Employment Tax Deduction
Freelancers and small business owners can deduct half of their self-employment tax (via Schedule SE).
Pro Tip
Keep detailed records of any deductions claimed on Schedule 1 to ensure compliance in the event of an audit.
Special Considerations for Expats Filing Schedule 1
If you’re a U.S. citizen or resident living abroad, Schedule 1 is particularly important for reporting foreign income and claiming adjustments related to expat life.
Reporting Foreign Income
As a U.S. expat, you’re required to report your worldwide income, which could include:
- Rental income from property outside the US
- Income from foreign pensions or annuities.
- Self-employment income earned while living abroad.
Using Adjustments to Lower Your Tax Bill
While Schedule 1 won’t help with the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC), it does let you claim deductions for health insurance premiums, retirement contributions, and other expenses that lower your taxable income.
How to File Schedule 1, Step by Step
Step 1: Gather Your Documents
Before you start, make sure you have all the necessary documents, such as:
- 1099 forms for freelance or side gig income.
- Proof of deductions (e.g., retirement contributions, student loan statements).
- Income and expense records for rental properties or other income sources.
Step 2: Fill Out Part I (Additional Income)
For each line, enter the net income you received during the tax year. Before doing so, you’ll need to use the corresponding schedules (e.g., Schedule C for business income, Schedule E for rental income) to calculate these net amounts.
Step 3: Fill Out Part II (Adjustments to Income)
Enter the total deductions you’re eligible to take, such as retirement contributions or HSA deposits. Double-check eligibility requirements for each deduction to ensure accuracy.
Step 4: Transfer Totals to Form 1040
Once you’ve completed Schedule 1, carry over the totals:
- Additional income goes on Line 8 of Form 1040.
- Adjustments to income go on Line 10 of Form 1040.
Common Mistakes to Avoid
Filing Schedule 1 incorrectly can lead to penalties or missed opportunities for deductions. Avoid these common pitfalls:
Forgetting to Report All Worldwide Income
Failing to include income like rental earnings or unemployment benefits can trigger an IRS audit. Just because these earnings come from outside the US doesn’t mean they can be left off your US tax return.
Overlooking Deductions
Make sure you’re claiming all eligible deductions, such as retirement contributions or self-employment health insurance premiums.
Missing Documentation
Always keep records for income and deductions reported on Schedule 1. The IRS may request proof if your return is flagged for review.
Simplify Your Taxes With Expert Help
Filing Schedule 1 can seem daunting, especially when juggling multiple income sources or deductions. But with the right guidance, it’s an opportunity to ensure your taxes are accurate and to lower your taxable income. For expats, freelancers, and small business owners, Schedule 1 is a vital part of staying compliant with IRS regulations while minimizing your tax liability.
