Some taxpayers will have income, taxes, and credits that aren’t part of Form 1040. However, these additional items need to be declared on the taxpayer’s tax return. That’s where Schedules 1, 2, and 3 come in.
What Are Schedules 1, 2, and 3?
Schedules 1, 2, and 3 are supplemental documents that are part of a taxpayer’s income tax filing package, even if they aren’t filled out.
This form is titled Additional Income and Adjustments to Income and has two parts. Schedule 1 is included with your tax return, even if blank. For taxpayers with simple income such as a W2 and maybe some stock investments, they probably don't need to fill out a Schedule 1.
For those with more sources of income or complex income sources, a Schedule 1 will probably be used. Other forms/worksheets can be used with Schedule 1. The values from any additional forms will flow through to Schedule 1.
The first part of Schedule 1 is Additional Income. This can include alimony, gambling, business revenue, tax refund, cancellation of debt, and more. All income in Part I is totaled and goes on Form 1040.
Part II is Adjustments to Income. It includes eligible expenses and deductions that offset income from Part I. These adjustments are totaled at the bottom of Part II and go on Form 1040.
Schedule 2 is for Additional Taxes. Like Schedule 1, this form may be blank but is still included with your 1040. It is a two-page form with two parts.
Part I is titled Tax and is for the alternative minimum tax (AMT) and excess advance premium tax credit repayment, which is related to ACA health insurance credits. These two values are added and transferred to form 1040. That’s it for Part I.
Part II covers a broad range of Other Taxes that are outside of the two mentioned above. These include taxes on self-employment, HSA, net investment income tax, interest related to Form 8621, and many other taxes. Amounts in this section are added and transferred to Form 1040.
Schedule 3 is titled Additional Credits and Payments. This form is also two pages and has two parts.
Part I is titled Nonrefundable Credits. A nonrefundable credit can offset your tax liability, but you can't receive a refund (i.e., direct deposit or check). However, these credits are a dollar-for-dollar offset.
Nonrefundable credits in this section consist of those related to education, retirement contributions, residential energy, adoption, an electric vehicle, and more. All credits are added at the bottom of the form and transferred to Form 1040.
Part II is titled Other Payments and Refundable Credits. As with Schedules 1 and 2, Part II is a catchall. Some line items in Part II include net premium tax credit, health coverage tax credit, and deferred amount of net 965 tax liability. The bottom of this section is also a total of all line items and is transferred to Form 1040.
What Are They Used For?
In 2018, the IRS decided to simplify or at least shrink Form 1040. Previous to 2018, there were different 1040s such as Form 1040A and 1040EZ. Those two forms have been replaced with the compact Form 1040.
The IRS was able to shrink Form 1040 by moving some details out of the form. Instead of a long form, taxpayers have a much shorter form. Some of those details moved out of Form 1040 found their way into Schedules 1, 2, & 3.
With certain details going onto these schedules, only the totals from each schedule were needed on Form 1040. This makes it easier for taxpayers to read important values, such as totals, on Form 1040 without getting bogged down or confused with too many details.
It doesn’t mean that filing your tax return has gotten any simpler. Those details are still required where applicable, which is why it's best to work with a tax professional when filing your taxes.
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