Adjustments to income come off your gross total income and result in your adjusted gross income (AGI). Eligibility for a good many itemized deductions and tax credits depends on your AGI. The higher it is, the less likely you are to qualify.

Adjustments to Income on Your Tax Return

Your AGI appears on line 11 of the 2022 Form 1040, the return you’ll file in 2023. The standard deduction or the total of your itemized deductions appears just after this, on line 12. You can claim the qualified business income deduction on line 13 if you’re eligible, then add it to your standard or itemized deductions. This results in your taxable income, which appears on line 15.

The Numbered Schedules

Three numbered schedules must accompany your tax return if they apply to your financial and tax situations. The corresponding information from these schedules is then entered on your tax return and they help determine your AGI in most cases. These schedules were introduced in 2018 when Form 1040 was redesigned by the Internal Revenue Service (IRS). There were six schedules prior to 2018. These three are numerical, while those from before 2018 are identified by letters, such as Schedule A that lists your itemized deductions. Some of these lettered schedules are still in use.

Schedule 1: Added Earnings

Form 1040 asks you to report some added earnings on Schedule 1. They include:

Business income or loss as calculated on Schedule CAlimony receivedTaxable credits, offsets, or refunds from state and/or local tax returnsRents and royalty income as calculated on Schedule EFarm income or loss as calculated on Schedule FGambling incomePrizes and awardsCapital gains or lossesUnemployment compensation"Other Income," which can include prizes and awards, gambling winnings, and earnings from an activity not engaged in for profit, such as money you made from your hobby

The total of all these sources of income is arrived at on line 10 of Schedule 1 and transfers to line 8 of the 2022 Form 1040.

Schedule 1: Adjustments to Income

Your adjustments to income are entered in Part II of Schedule 1. These are the amounts that were previously referred to as “above-the-line” deductions because they appeared on the first page of the tax returns that were in use in 2017 and in earlier years. This information was entered just above those forms’ final page on the line that showed adjusted gross income. These adjustments/deductions include:

Educator expensesCosts incurred by military reservists, performing artists, and fee-based government officialsHealth savings accounts (HSAs)Moving expenses for members of the armed forcesSeveral self-employment costs, such as retirement plan contributions, health insurance premiums, and half the self-employment tax as reported on Schedule SESavings withdrawal penalty amountsStudent loan interestTuition and other education expensesThe traditional IRA deductionAlimony paid in 2018 or earlier

The total of all these deductions is subtracted from your gross income to arrive at your AGI on line 10 of your 2022 tax return. You can then subtract either the standard deduction or the total of your itemized deductions from your total income to get your AGI. You would then add your standard or itemized deductions and qualified business income, then subtract the total from your AGI on line 11 to get your taxable income on line 15. This is the figure that’s used to calculate your federal income tax liability: how much you owe the IRS or the amount of a tax refund you can expect.

Educator Expenses

The adjustment to income for classroom expenses for teachers and educators is $250. It increases to a total of $500 ($250 each) if you’re married and filing a joint return and both you and your spouse are educators. You and your spouse can’t each claim a $500 adjustment to income. You must be a teacher, instructor, counselor, principal, or aide for students from kindergarten through grade 12. You must work at least 900 hours a year in a school that provides elementary or secondary education.

Alimony Payments

It used to be that you didn’t have to pay taxes on the portion of your income that you contributed to your ex-spouse each month in the form of alimony, but that changed with the Tax Cuts and Jobs Act (TCJA) in 2018. Your ex used to be taxed on this income instead, but not anymore. You must provide your ex’s Social Security number on your tax return if you want to claim this adjustment to income for divorces entered into and alimony ordered prior to 2019. Certain rules apply, such as that the alimony must be provided for in a court order.

Moving Expenses

This adjustment to income is only available to service members. Your move must be necessitated by a military order and be a permanent change of station. Moving expenses incurred by your spouse or dependents qualify as well.

The Self-Employment Tax

You must pay 100% of your Social Security and Medicare taxes if you’re self-employed. This is referred to as the “self-employment tax.” Your employer would pick up half of these taxes if you worked for someone else. But the IRS effectively gives that other half back to you as an adjustment to income on line 15 of Schedule 1.

Self-Employed Health Insurance

You would have to itemize to claim a deduction for what you spend on health insurance premiums if you worked for someone else, and that deduction is subject to some limitations. But you can deduct 100% of what you spend on premiums if you work for yourself. The policy can cover you, your spouse, and your dependents. No other insurance coverage can be available to you, however, such as through an employer if you also hold down a regular job, or your spouse’s employer if they work and are provided with insurance benefits that would cover you. 

Effect on the Alternative Minimum Tax

Adjustments to income aren’t added back when you’re calculating the alternative minimum tax (AMT) if you happen to be subject to that tax. The AMT is an alternate method of calculating your federal income tax liability, and it starts with adjusted gross income. Adjustments to income reduce your AGI, so by extension they can lower the alternative minimum tax as well and possibly help you dodge that bullet. 

Effect on Other Deductions and Credits 

Some itemized tax deductions are limited by a taxpayer’s AGI. For example, medical expenses can only be deducted to the extent that they exceed 7.5% of your AGI. Suppose you have an AGI of $50,000 for the 2022 year. You have qualifying medical expenses totaling $6,000 for the year. You can deduct your medical expenses to the extent that they exceed 7.5% of your AGI, or $3,750. Your medical expenses of $6,000 exceed this threshold by $2,250, so you can claim $2,250 out of your $6,000 in expenses as an itemized deduction. But suppose that you also contribute $1,000 to a traditional individual retirement account (IRA) in that same tax year. These contributions are an adjustment to income, so this reduces your AGI by $1,000. Now it’s $49,000. You’d have a threshold of $3,675, or 7.5% of $49,000, rather than $3,750 for calculating your medical expenses deduction so you can deduct an additional $75 in medical expenses for a total of $2,325 rather than $2,250. 

Effect on Other Taxes

Increasing adjustments to income can also decrease other taxes, because some surtaxes are calculated based on AGIs. The 3.8% net investment income tax is based in part on a person’s modified adjusted gross income (MAGI) over certain thresholds. You can avoid paying this tax if you can reduce your AGI below those thresholds. Most tax preparation software is well equipped to handle all these scenarios, and you can always seek the help of a tax professional if you really don’t feel that you can handle it yourself.