Chapter 8: Adjustments to Income

Overview

Chapter Description
Upon completion of this chapter, students will be able to determine whether any of the adjustments
to total income specified on lines 11-26 of Schedule 1 (Form 1040) apply to a taxpayer. Students
will also be able to explain the calculation of each adjustment and be able to identify any additional
form required to report the applicable adjustment on a taxpayer's federal return.

The following content is based on 2022 tax law for 2021 tax returns; however, discussions
of prior year tax law will be addressed as applicable.

Learning Objectives
1) Explain the applicability and reporting of the educator and moving expense adjustments
as they relate to employment.
2) Discuss the required reporting of the three business-related adjustments.
3) Review the required reporting of the retirement-related adjustments for self-employed and
individual taxpayers.
4) Explain the applicability and reporting of the adjustments related to education expenses.
5) Determine when a deduction can be taken for a Health Savings Account, penalty on early
withdrawal of savings, or alimony as they apply to the individual taxpayer.
6) Identify the other less common adjustments, which, if applicable, will be included as part
of the totals on Schedule 1 (Form 1040).

Key Terms
• Adjusted Gross Income (AGI)
• Adjustments to Income
• Excess Contributions
• Individual Retirement Arrangement (IRA)
• Keogh Plan
• Modified AGI for purposes of IRAs
• Phaseout
• Roth IRA
• Self-Employment Tax
• Tax-Deferred

Outline of Chapter Learning Materials

Based on the chapter learning objectives specified above, the chapter materials will be organized
into six major categories. Each category will include two or more of the adjustments listed on lines
11-26 of Schedule 1 (Form 1040). Each adjustment will decrease the taxpayer's total income. After
subtracting all applicable adjustments, the taxpayer will arrive at an amount called adjusted gross
income (AGI). The major categories and adjustments included within each objective will be
discussed as follows:

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 1. Employment-related:
• Educator expenses
• Moving expenses for members of the Armed Forces
2. Business-related:
• Certain business expenses of reservists, performing artists, and fee-basis
government officials
• Deductible portion of self-employment tax
• Self-employed health insurance deduction
3. Retirement-related:
• Self-employed SEP, SIMPLE, and other qualified plans
• IRA deduction
4. Adjustments related to education expenses:
• Student loan interest deduction
• Tuition and fees deduction
5. Adjustments related to individual taxpayers:
• Health savings account deduction
• Penalty on early withdrawal of savings
• Alimony paid (for divorces that were finalized by 31 December 2018)
6. Other less common adjustments (lines 24a-24z of Schedule 1 (Form 1040))

Objective #1: Employment-Related Adjustments

Educator Expenses
A maximum of $250 of qualified expenses paid by a taxpayer who was an eligible educator for tax
year 2021 may be deducted on line 11 of Schedule 1 (Form 1040). For taxpayers filing jointly, the
maximum deduction is $500 ($250 each) of qualified expenses if both taxpayers were eligible
educators. However, the deduction is not shared between the spouses, meaning one spouse
cannot deduct $300 of qualified expenses while the other spouse deducts $200 of qualified
expenses. Both spouses may deduct a maximum of $250 each.

A tax preparer must understand who meets the definition of an eligible educator, before deducting
qualified educator expenses on a taxpayer's return. Taxpayers whose function or title is as listed
below and who work with students in kindergarten through grade 12 are eligible educators:
• Teachers
• Instructors
• Counselors
• Principals
• Aides who are in a school for at least 900 hours during a school year

Based on the strict guidance indicated above, daycare and nursery school teachers would not be
eligible. Aides must be able to document that they were employed by a school for at least 900
hours during the school year.

After it is determined that the taxpayer is an eligible educator, the second step is to calculate the
amount of qualified expenses.

Qualified expenses include ordinary and necessary expenses paid:

• For professional development courses, the taxpayer has taken related to the curriculum
they teach or to the students they teach, or
• In connection with books, supplies, equipment (including computer equipment, software,
and services), and other materials used in the classroom.

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 An ordinary expense is one that is common and accepted in the taxpayer's educational field.
A necessary expense is one that is helpful and appropriate for the taxpayer's profession as an
educator. An expense does not have to be required to be considered necessary.

Practice Note: In order to prevent the spread of COVID-19, some educators may have
incurred expenses related to personal protective equipment, disinfectant, and other
supplies. Any amounts incurred or paid after March 12, 2020, are considered qualified
educator expenses.

Qualified expenses do not include expenses for homeschooling or nonathletic supplies for
courses in health or physical education. The taxpayer must reduce their qualified expenses by
the following amounts:
• Excludable U.S. series EE and I savings bond interest from Form 8815.
• Nontaxable qualified tuition program earnings or distributions.
• Any nontaxable distribution of Coverdell education savings account earnings.
• Any reimbursements the taxpayer received for these expenses that were not reported
in box 1 of their Form W-2. 1

Taxpayers who are eligible educators must present documentation that supports their claimed
adjustment for educator expenses. This documentation should consist of such items as receipts,
canceled checks, and anything else that could indicate the cost, type of item, purpose, and amount.

The educator expenses are to be listed as an adjustment to income on Schedule 1 (Form 1040),
line 11.

&:hedule 1 (Form 1040) 2021 Page 2

■ !.l-:111 ■ 1 ■ Adjustments to Income
I 11 Educator exoenses 11 I
12 Certain business expenses of reservists, performing artists, and fee-basis government
officials. Attach Form 2106 12 2

Moving Expenses
Who Can Deduct Moving Expenses?
If the taxpayer is a member of the Armed Forces on active duty and their move is due to a military
order and incident to a permanent change of station, they can deduct the moving expenses. Moving
expenses are reported on Schedule 1 (Form 1040), line 14. Note that Form 3903, Moving
Expenses, should be completed first to ensure the entry on line 14 is accurate.

, 13 Health savings account deduction. Attach Form 8889 . . . . . . . 13

1 14 Movina exoenses for members of the Armed Forces. Attach Form 3903 14 I
15 Deductible part of self-employment tax. Attach Schedule SE . . . . 15 3

1
2021 Form 1040 Instructions, page 88
2
2021 Schedule 1 (Form 1040), page 2
3
2021 Schedule 1 (Form 1040), page 2

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 A permanent change of station includes:
• A move from the service member's home to the first post of active duty;
• A move from the service member's one permanent post of duty to another; and
• A move from the service member's last post of duty to their home or to a nearer point in
the U.S. The move must occur within one year of ending the member's active duty or
within the period allowed under the Joint Travel Regulations.

Practice Note: Prior to the TCJA, taxpayers were permitted to take an above-the-line
deduction for certain residential moving expenses, provided they met both the distance and
time tests:
• To meet the distance test, the distance between the taxpayer’s new job and original
residence was required to have been at least 50 miles further than the taxpayer’s
previous employer was from the same original residence. For example, if the
taxpayer’s previous commute to work was 10 miles each way, the taxpayer’s new
commute to his or her new job location must be at least 60 miles.
• To meet the time test, the taxpayer was required to work full-time for at least 39
weeks during the initial 12-month period beginning when he or she moves to the
new location.
For purposes of this deduction, taxpayers could consider reasonable expenses incurred to
move to his or her new residence, such as transportation expenses.

The TCJA suspended the above-the-line deduction for moving expenses for tax years 2018
through 2025 for all taxpayers other than members of the Armed Forces.

Spouse and dependents – If a service member of the Armed Forces dies, is imprisoned, or
deserts, a permanent change of station for the spouse or dependent includes:
• A move to the place of enlistment,
• A move to the service member's, spouse's, or dependent's home of record, or
• A move to a nearer point in the U.S.

If the military moves the service member, their spouse, and dependents to or from separate
locations, treat the moves as a single move to the service member's new main job location.

Deductible Moving Expenses

Deductible moving expenses include:
• The reasonable expenses of moving the household goods and personal effects,
including expenses for moving trailers, packing, insurance, and in-transit storage.
• Storage and insurance costs, including the cost of storing and insuring any household
goods within any period of 30 consecutive days after the taxpayer moves them from his or
her prior home and before he or she moves them into his or her new home.
• Traveling to the new home, including certain lodging expenses, car expenses, and
airfare. Taxpayers may elect to use either out-of-pocket expenses or a standard mileage
rate.
Taxpayers may not deduct the following expenses:
• Expenses incurred to move furniture purchased after moving from the previous home and
before moving into the new home.
• Expenses incurred for meals while traveling to the new home.
• Expenses incurred for unnecessary side trips or extravagant lodging.
• Expenses for moving services provided by the government.

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Reasonable expenses mean that the service member can deduct only those expenses that are
reasonable for the circumstances of the move. For example, the cost of traveling from one's former
home to the new home should be by the shortest, most direct route available by conventional
transportation.

Travel by car – If the service member uses their car to travel to their new home, they can use
either actual expenses or the standard mileage rate to deduct the expenses. The standard mileage
rate for moves made during 2021 is 16 cents per mile. If the service member uses actual expenses,
they can deduct the amount they paid for gas or oil if they keep an accurate record of each expense.
They can deduct the parking fees and tolls no matter which method is chosen.

Member of the household – The service member can deduct moving expenses paid for the
service member and all and members of the household.

Storage expenses – The service member can deduct the cost of storing and insuring household
goods and personal effects within any period of 30 consecutive days after the day the things were
moved from the previous home and before they are delivered to one's new home.

Travel expenses – The service member can deduct the cost of transportation and lodging for the
service member, and all the household members while traveling from the previous home to the new
home. The household members don't have to travel together or at the same time. However, the
service member can only deduct the expenses for one trip per person.

Expenses reimbursed – If the service member is reimbursed for the moving expenses and the
cash method of accounting is employed, one can deduct the expenses either in the year they were
paid or in the year one receives the reimbursement. If the service member deducts the moving
expenses in the current year and receives the reimbursement in a later year, that reimbursement
is considered to be income for the year received, and it is, therefore, reported on line 8z of Schedule
1 (Form 1040).

Form 3903 is used to determine the amount of the moving expense deduction. Each move requires
its own Form 3903; multiple moves may not be included together on Form 3903. For more detailed
information, please refer to the instructions for Form 3903.

Moving Expenses
,m3903 0 MB No. 1545-0074

OepartmMI ol the T,oo.sur; ► Go to www.irs.gov/Form3903 for instructions and the lat est informatioo. ~©21
Attachment
lntemal R_,ue S..-.,lce (99) ► Attach to Form 1040, 1040-SR, or 1040-NR. Sequence No. 170
Na:me(s) shown on retum Your social security number

Before you begin: You can deduct moving expenses only if you are a Member of the Armed Forces on active duty and, due to a
military o rder, you, your spouse, or your dependents move because of a permanent change of station.
Check here to certify that you meet these requirements. See the instructio ns ► D
Transportation and stora11e of household goods and personal effects (see instructio ns) . .

2 Travel (including lodging) from your old home to your new home (see instructions). Do not include the
cost of meals 2
~--------

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 Practice Note: Unemployment compensation is generally fully taxable to recipients;
however, APRA partially excluded unemployment compensation received in 2020 from the
income of some taxpayers.

Under ARPA, for tax year 2020, if the taxpayer’s modified AGI for the tax year was less than
$150,000, the taxpayer could exclude up to $10,200 of unemployment compensation
received (or in the case of a joint return, received by each spouse) from gross income. The
same $150,000 threshold applied to returns filed jointly, as head of household, or with single
status. In the case of a joint return, the $10,200 exclusion applied separately to each spouse,
meaning that each spouse was eligible for the $10,200 exclusion, for a total maximum
exclusion of $20,400. There was no income phaseout provided for the exclusion, so if the
taxpayer’s AGI was $150,000 or more, the exclusion would not apply and all of the
individual’s unemployment compensation would be included in gross income.

For purposes of determining the partial exclusion, the taxpayer’s modified AGI was
determined after the application of the partial exclusion of Social Security and tier 1 railroad
retirement benefits in gross income, exclusion of income from United States savings bonds
used to pay higher education tuition and fees, exclusion of any amount received under an
adoption assistance program, the deduction for qualified retirement contributions, the
student loan deduction, the deduction for qualified tuition and related expenses, and the
limitation on passive activity losses and credits. Unemployment compensation was not
included in modified AGI.

In March 2021, the IRS released instructions on their website regarding how to take
advantage of the new unemployment compensation exclusion. Per the updated IRS
guidance, taxpayers reported any Form 1099-G box 1 unemployment compensation
amounts on line 7 of Schedule 1, Form 1040. On line 8 of Schedule 1, Form 1040, the
taxpayer wrote “UCE” and reported the exclusion amount as a negative amount (in
parentheses). As part of the IRS guidance, the IRS released a new “Unemployment
Compensation Exclusion Worksheet” (below) to assist taxpayers in calculating the amount
they were eligible to exclude. Essentially, the taxpayer transferred the result of step 11 of
the “Unemployment Compensation Exclusion Worksheet” to Form 1040, Schedule 1, Line 8.

nemploymen t Compen sation Exclu s ion Works heet-Sched ule 1, Line 8

1. If you are filing Form IMO or IMO-SR, enter the total of lines I through 7 ofForm 1040 or I MO-SR If you
are filing Form IMO-NR, eoter the total oflioes la, lb. and lioes 2 through 7 1. - - -
2. Enter the amown from Schedule 1, lines 1 through 6. Don' t include any amowit of wiemployment
compensation from Schedule 1, line 7, on this line 2. - - -
3. Use the line 8 instruction s to determine the amount to indude on Schechtle 1, line 8, and enter here. Do not
reduce this amount by the amount of unemployment compensation you may be able to exclude 3. - - -
4. Add lioes I, 2, and 3 4.
---
5, If you are filing Form IMO or 1040-SR, eoter the a,nount from lioe IOc. If you are filing Form 1040-NR,
enter the amount from line 10d . 5. - - -
6, Subtract line 5 from line 4. Ibis is your modified adjusted gross income 6.
---
7, Is the amow1t on line 6 $150,000 or more? l11e $150,000 threshold applies to all filing statuses even if your
filing starus is married filing jointly.
D Yes. Stop. You can ' t exclude any of your tmemployment compensation.

D ri"o. Gotolioe8
8, Enter the amowit of unemployment compensation paid to you in 2020. Don ' t enter more than $10,200 8, - - -
9. If married filing jointly, enter the amomt of unemployment compensation paid to your spouse in 2020. Don' t
enter more than $10,200. If you are filing Form 1040-NR, enter-0- 9. ---
10. Add lines 8 and 9 and enter the amount here. Th.is is the amount of unemployment compensation excluded
from your income 10. - - -
ll. Subtract line 10 from line 3 and enter the ammmt on Schedule 1, line 8. If the result is less than zero, enter it
in parentheses. On die dotted line next to Schedule 1. line 8. enter '1.JCE" and show the amomt of
unemployment compensation exclusion in parendteses on the dotted line. Complete the rest of Schedttle 1 and
Form 1040, 1040-SR, or 1040-NR . ll. - - -
4

Congress did not extend the unemployment compensation exclusion, and as a result,
unemployment compensation reported on 2021 tax returns is fully taxable.

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 Review Question 1
Jack and Jill are teachers. Jack teaches fifth grade at a public school while Jill teaches pre-
kindergarten, which is attached to a private daycare facility. Jack paid $310 for ordinary and
necessary classroom expenses. Jill paid $270 for ordinary and necessary classroom expenses.
Neither were reimbursed for their expenses. What would be the correct adjustment for educator
expenses on their joint return?

a) $310
b) $250
c) $500
d) $580

Review Question 2
In April 2021, Sam (in the military) and Amy moved from Norfolk, Virginia, where Sam was
stationed, to Bellevue, Nebraska, his new duty station. Sam drove the family car from Norfolk,
Virginia, to Bellevue, Nebraska. The total mileage is 1,550 miles. He paid $80 for parking fees
and tolls and $280 for lodging. He also paid $120 for the meals during the trip. A week later,
Amy flew from Norfolk, Virginia, to Bellevue, Nebraska. The plane ticket was $500. Using the
standard mileage rate, what amount can Sam and Amy deduct for moving expenses on their
2021 tax return?

a) $1,228
b) $ 860
c) $ 780
d) $1,108

Objective #2: Business-Related Adjustments

Certain Business Expenses of Reservists and Others

These adjustments are to be reported on Schedule 1 (Form 1040), line 12. They include the
following items:
• Certain business expenses of National Guard and reserve members who traveled more
than 100 miles from home to perform services as a National Guard or reserve member.
• Performing-arts-related expenses as a qualified performing artist.
• Business expenses of fee-basis state or local government officials. 5

le 1 (Fonn 1040) 2021 Page 2

■ •,F.r.111 ■ Adjustments to Income
11 Educator expenses 11
1 12 Certain business expenses of reservists, performing artists, and fee-basis government
officials. Attach Form 2106 12 I 6
13 Health savings account deduction. Attach Form 8889 13

4
2020 Form 1040 Instructions, page 88
5
2021 Form 1040 Instructions, page 88
6
2021 Schedule 1 (Form 1040), page 2

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Armed forces reservists traveling over 100 miles from home – An Armed Forces reservist is
any member of the Army, Navy, Marine Corps, Air Force, National Guard, or Coast Guard. Armed
Forces reservists can deduct the traveling expenses as an adjustment to their gross income when
they incur travel exceeding 100 miles from one's home, with relevance to the performance of
services as a member of the reserves. Eligible expenses that may be deducted include the regular
per diem rate for lodging, meals, and incidental expenses, the standard mileage rate for any car-
related expenses, and any tolls or parking fees. The taxpayer needs to complete Form 2106,
Employee Business Expenses, and then transfer the computed amount from line 10 of Form 2106
to line 12 of Schedule 1 (Form 1040).

!Employee Business Expenses 0 MB No_ 1545--0074

Form 2106 (for use only by Armed Forces reservi sts, qualified performing artists, fee-basis state or loca l
government officials, and employees w ith impairment-related work expenses)
Department ol the Trea,uy ► Attach to Form 1040, 1040-SR, or 1040-NR. Attachm ent
lntamal Re11enue S£1Vice 199) ► Go to www.irs.gov/Form2100 for instructions and the 1,a test information. Sequence N<>. 129
Your name Occupation in which you incurred expenses Socj a:I security number

Employee Business Expenses and Reimbursements

Column A ColumnB
Step 1 Enter Your Expenses Other Than Meals
Meals

1 Vehicle expense from line 22 or tine 29. (Rural mail carriers: See instructions.) . 1
2 Parking fees, tolls, and transportation, Including lraln, bus, etc., that didn't involve
overnight travel or commuting to and from work . 2
3 Travel expense wh[le away from home overnight, including lodging , airplane, car
rental, etc. Don "t lnc lude meals 3

4 Business expenses not included on tines 1 througli 3. Don't include meals . 4

5 Meals expenses (see instructions) 5

6 Total expens.es. In Column A, add tines 1 througli 4 and enter t he result. In Column
B, enter the amount from line 5 6
INote: If you weren't reimbursed for any expenses in Step 1, skip llne 7 and enter the amount from llne 6 on line 8.

Step 2 Enter Reimbursements Received From Your Employer for Expenses Listed in Step 1

7 Enter reimbursements received from your employer that weren't reported to you in
box 1 of Form W-2. Include any reimbursements reported under code " L" in box 12
of your Form W-2 (see instructions) . 7

Step 3 Figu re Expenses To Deduct

8 Subtract line 7 from line 6. II zero or fess, enter -0-. However, if line 7 is greater than
tine 6 in Column A, report the excess as inoome on Form 1040 or 1040-SR, line 1 (or Enter this amount on
line 12 of Schedule 1
on Form 1040-NR, line 1a)
Note: If both columns of llne 8 are zero, you can't deduct
8
-

\\
employee business expenses. Stop here and attach Form 2106 lo your return.

9 In Column A, enter tlie amount from line 8. In Column B, see the instructions for the
-
amount to enter 9
10 Add the amounts on line 9 of both columns and enter tlie total liere. Also, enter the total on Schedule 1
(Form 1040), line 12. Employees with impairment-related work expenses, see the instructions for rules
on wliere to enter the total on your return ► 10
For Paperwork Reduction Act Notice, see your tax return instructions. Cal No_ 1 H OON Form 2106 (202 1) 7

7
2021 Form 2106, page 1

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State or Local Government Officials paid on a fee basis – Qualifying fee-basis officials are
employed by a state or political subdivision of a state and earn fee-basis compensation, whether
wholly or partly. Fee-basis officials may deduct their employee business expenses as an
adjustment to gross income. They report their employee business expenses, as computed on line
10 of Form 2106 on Schedule 1 (Form 1040), line 12.

Expenses of certain performing artists – Performing artists may deduct their employee business
expenses as an adjustment to gross income on Schedule 1 (Form 1040), line 12, if they qualify.
To qualify, performing artists must meet all the following requirements:
• During the tax year, the taxpayer performs services in the performing arts as an employee
for at least two employers.
• The taxpayer receives at least $200 or more of wages from at least two employers (at least
$200 from each of the two).
• The taxpayer's performing-arts business expenses are over 10% of his or her gross income
that is derived solely from the performance of said services.
• The taxpayer's AGI does not exceed $16,000 without deducting these business expenses.
• If the taxpayer is married, he or she must file a joint return unless he or she lives apart from
his or her spouse for the entire tax year. 8

Please see the instructions for Form 2106 for additional information.

Deductible Portion of Self-Employment (SE) Tax

Self-employed taxpayers whose net earnings exceed $400 must pay both the employer's and the
employee's half of Social Security taxes and Medicare taxes (referred to as self-employment taxes).
The employee's rate for 2021 is 6.2% (Social Security tax) of the first $142,800 and 1.45%
(Medicare) of all earnings (there is no wage limit for the Medicare tax). Employers match those
amounts; they pay 6.2% (Social Security tax) of the first $142,800 and 1.45% Medicare tax on all
wages. Since the self-employed person is both employee and employer, they pay 15.3% on all
earnings up to and including $142,800 for 2021. Any excess over that threshold is taxed at 2.9%.
There is no upper limit to the amount that is subject to the Medicare portion of the SE Tax. Because
the self-employed person pays the entire amount, they are allowed to take an adjustment to income
(reported on Schedule 1) of 50% of the total self-employment tax. The tax is computed on Schedule
SE, along with the adjustment (deduction); this adjustment is then carried over to line 15 of
Schedule 1 (Form 1040). If the taxpayer also has W-2 wages, the net self-employment earnings
are combined with one's W-2 wages with regard to the threshold earnings limit for SE tax.

The amount subject to self-employment tax (SE tax) is 92.35% of net earnings from self-
employment. Net earnings from self-employment is equal to an individual’s gross income derived
in his or her trade or business less any ordinary and necessary trade or business expenses. The
7.65% reduction in taxable net profit is for the amount an employer would have paid had the
taxpayer been an employee. The remaining 92.35% is taxable self-employment earnings. In 2021
the net earnings from self-employment up to and including $142,800 are then multiplied by 15.3%
(12.4% Social Security tax + 2.9% Medicare tax) and any excess over the threshold is multiplied
by 2.9% to calculate the taxpayer's SE tax. An additional Medicare tax of 0.9% applies to wages,
compensation, and self-employment income over certain threshold amounts (discussed later). Fifty
percent (50%, the employer's portion) of the SE tax is deducted on line 15 of Schedule 1 (Form
1040).

8
2021 Form 2106 Instructions, page 4 (https://www.irs.gov/pub/irs-pdf/i2106.pdf)

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 50%
14 Movin ex enses for members of the Armed Forces. Attach Form 3903 . 14
15 Deductible part of self-emplo ment tax. Attach Schedule SE 15
16 Self-employed SEP, SIMPLE, and qualified plans . . . . . . . . . . 16 9

Self-employment tax does not apply to income earned as a shareholder of an S corporation or as

a limited partner of a partnership (except for guaranteed payments). A tax break is also afforded
to the newspaper carriers under age 18 because their earnings are not subject to SE tax.

Example 1: Charlie is self-employed and runs his own auto repair shop. His total net income
for 2021 was $200,000. His self-employment tax is based on 92.35% of his total net income
of $200,000, or $184,700. Since Social Security tax is only paid on the first $142,800 of
earnings, Charlie will owe $17,707.20 ($142,800 × 12.4%). The 12.4% is made up of the
6.2% employee portion and 6.2% employer portion. Additionally, Charlie will pay a 2.9%
Medicare tax on all of his earnings, as there is no limit on the amount of earnings subject to
the Medicare portion of SE tax. As such, Charlie will pay $5,356.30 ($184,700 × 2.9%). In
total, Charlie will pay $23,063.50 in self-employment taxes ($17,707.20 Social Security tax
+ $5,356.30 Medicare tax). Since Charlie is self-employed, he is entitled to claim a deduction
for half of the self-employment tax he paid, or $11,531.75 ($23,063.50 / 2).

Practice Note: To aid taxpayers during the economic downturn caused by COVID-19, the
CARES Act allowed employers and self-employed individuals to defer payment of the
employer share of the payroll tax that they were otherwise responsible for paying to the
federal government with respect to their employees. Payroll taxes that could be deferred
included the employer portion of FICA taxes, the employer and employee representative
portion of Railroad Retirement taxes (that are attributable to the employer FICA rate), and
half of SECA tax liability.

Self-employed individuals could defer the payment of 50% of the Social Security tax imposed
on net earnings from self-employment income. This amount represents the employer share
of the Social Security tax is 6.2% of employee wages. A self-employed individual’s net
income from self-employment is calculated based on his or her method of accounting. For
example, if a self-employed individual uses the cash method of accounting, he or she will
include all income actually or constructively received during the period and all deductions
actually paid during the period when determining his or her net income from self-
employment. Part III was added to Schedule SE for 2020 to help self-employed individuals
calculate the maximum amount of self-employment taxes that they could defer.

The payroll tax deferral period began on March 27, 2020, and ended on December 31, 2020.
The deferred payroll tax payment must be paid over the following two years, with half of the
total deferred payment to be paid by December 31, 2021, and the remaining half of the
deferred payment to be paid by December 31, 2022. Taxpayers were not required to make
a special election in order to defer payroll taxes.

9
2021 Schedule 1 (Form 1040), page 2

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 Additional Medicare Tax
A 0.9% additional Medicare tax will be applied to the taxpayer's Medicare wages, railroad
retirement (RRTA) compensation, and self-employment income (combined with their spouse's
applicable income if filing a joint return) if the total of these income items exceeds:
• $250,000 – Married Filing Jointly
• $125,000 – Married Filing Separately
• $200,000 – Single, Head of Household, or Qualifying Widow(er)

Form 8959, Additional Medicare Tax, is used to calculate the amount of additional tax owed and
the amount of additional Medicare tax the employer should withhold. Total additional Medicare tax
is computed on Form 8959, line 18, and then reported Schedule 2, line 11, of Form 1040.

Self-Employed Health Insurance Deduction

A self-employed taxpayer may be able to deduct as an adjustment to income the amount paid for
health insurance for himself or herself, his or her spouse, and his or her dependents on line 17 of
Schedule 1 (Form 1040). The amount to be listed on line 17 is 100% of the amount paid for medical
insurance and qualified long-term care insurance for the taxpayer and his or her family in 2021,
provided one of the following conditions applies:
1. The taxpayer is a self-employed individual and had a net profit for the year, as reported on
Schedule C or Schedule F
2. The taxpayer was a partner with net earnings from self-employment.
3. The taxpayer used an optional method to compute net self-employment earnings on
Schedule SE.
4. The health insurance coverage was established under an S corporation in which the
taxpayer owns more than 2% of the outstanding stock and from which they received
wages.

16 Self-emoloved SEP SIMPLE and aualified olans 16

'11 Self-employed health insurance deduction . 17 I
18 Penalty on early withdrawal of savings . . . . 18 10

If a taxpayer’s child was under age 27 at the end of 2021, then that child can be covered by the
(self-employment health) insurance plan, even if the child could not be declared as the taxpayer’s
dependent. A child includes the taxpayer’s daughter, son, adopted child, stepchild, or foster child
(i.e., any child placed with the taxpayer by an authorized placement agency or by judgment, decree,
or other order of any court of competent jurisdiction).

The taxpayer’s business must establish the insurance plan, and the taxpayer’s services must be a
material income-producing factor in such business. Premiums are not deductible for any month
that a taxpayer or spouse was eligible to participate in an employer-subsidized health plan. In
addition, if the taxpayer was eligible for any month or part of a month to participate in a subsidized
health plan maintained by the employer of either the taxpayer, his or her spouse, or his or her
dependent or child who was under age 27 at the end of 2021, the premiums will not be allowed as
a deduction. For purposes of calculating the deduction, qualified small employer health
reimbursement arrangements (QSEHRAs) are considered to be a subsidized health plan
maintained by the employer.

10
2021 Schedule 1 (Form 1040), page 2

Copyright © 2022, The Income Tax School, Inc. – All Rights Reserved Page 8.11
 Example 2: Jon is a self-employed taxpayer for all of 2021 and maintains health insurance
coverage for himself. On September 1, Jon’s wife, Janice, started working for XYZ
Corporation, and as part of her employment, she and Jon are eligible to participate in XYZ
Corporation’s subsidized health plan, effective immediately. Jon chooses to maintain his
own health insurance coverage. For purposes of the Self-Employed Heath Insurance
deduction, Jon cannot include amounts paid for health insurance coverage for September 1
through December 31, as he was eligible to participate in his wife’s employer-subsidized
health plan.

The deduction is also limited by the earned income. The deduction is the lesser of 100% of the
insurance premiums or the income from the business. For Schedule C, it would be the net profit
less the SE tax deductions (as reported on Form 1040, Schedule 1, line 15) and SEP deductions
(Form 1040, Schedule 1, line 16). If the taxpayer is also itemizing, amounts listed on Schedule 1,
line 17 cannot be deducted as a medical expense on Schedule A. If the taxpayer qualifies to take
the deduction, he or she should use the Self-Employed Health Insurance Deduction Worksheet to
figure the amount he can deduct. Following is a copy of the worksheet found in the Instructions for
Form 1040. See the worksheet following.

-Employed Health Insurance Deduction Worksheet- Schedule 1, Line 17

Before you begin: j If, during 2021, you were an eligible trade adjustment ass istance (T AA) recipient, alternati ve TAA
(ATAA) recipient, reemployment TAA (RTAA) recipient, or Pension Benefit Guaranty Corporation
pension payee, see the Instructions for Form 8885 to figure the amount to enter on line I of this work­
sheet.
j Be sure you have read the Exceptions in the instructions for this line to see if you can use this work­
sheet instead of Pub. 535 to figure your deduction.
I. Enter the total amount paid in 202 1 for health insurance coverage established under your business
(or the S corporation in which you were a more-than-2% shareholder) fo r 2021 for you, your
spouse, and your dependents. Your insurance can also cover your child who was under age 27 at
the end of 2021, even if the chi ld wasn't your dependent. But don 'I include amounts for any month
yo u were el igible to participate in an employer-sponsored health plan or amounts paid from
retirement plan distributions that were nontaxable because you are a retired public safety
officer . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. . .. .. .. .. .. .. .. . ...... ...... 1.
2. Enter your net profit• and any other earned income** from the business under which the insurance
plan is establ ished, minus any deductions on Schedule I, lines 15 and 16. Don't include
Conservation Reserve Program payments exempt from self-employment lax . . . . . . . . . . . . . . . 2.
3. Self-employed hea lth ins urance deduction . Enter the smaller of line I or line 2 here and on
Schedule I, line 17. Don't include th is amount in figuring any medical expense deduction
on Schedule A 3.
*Ifyou used either optional method to figure your net eamingsfrom self-employment, do11 'tenter your net profit. Instead, enter the amount
from Schedule SE, /i11e 4b.
•• Earned income includes net earnings and gains from the sale, tra11sfer, or licensing ofproperty yau created. However, it doesn't include
capital gain income. Ifyou were a more-tlwn-2% shareholder in the S corporation under which the insurance plan is established, earned
income is your Medicare wages (box 5 of Form W-2) from that corporation.
11

11
2021 Form 1040 Instructions, page 89

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Exception: Use the worksheet found in Publication 535, Business Expenses, instead of the
worksheet found in the Form 1040 Instructions, to figure the taxpayer's deduction should any of
the following applies:
• The taxpayer had more than one source of income subject to self- employment tax.
• The taxpayer filed Form 2555
• The taxpayer is using amounts paid for qualified long-term care insurance to compute the
deduction.

If the taxpayer's business health insurance plan was obtained through the Marketplace and the
taxpayer is claiming the premium tax credit, use Publication 974, Premium Tax Credit (PTC),
instead of either of these worksheets to compute the deduction.

Review Question 3
Joey Redd had a net profit of $800 from his business. Which of the following would be the
correct amount of his self-employment tax adjustment? (Round all amounts to the nearest
dollar.)

a) $ 57
b) $113
c) $122
d) $ 61

Review Question 4
Jim is self-employed. He had a net profit (after his self-employment deduction) of $15,000. He
established a health insurance plan under his business, which covered him, his spouse, and one
dependent. The premium was $1,550 per month ($500 of this amount was for his spouse and
dependent) and was paid over the entire year. The whole family was eligible for coverage by
his spouse’s employer for the first two months of the year. What is Jim’s self-employed health
insurance deduction?

a) $18,600
b) $15,000
c) $15,500
d) $12,600

Objective #3: Retirement-Related Deductions

Self-Employed SEP, SIMPLE, and Qualified Plans

An employer can offer its employees a tax-favored way to attain retirement savings by offering the
employees a SEP (simplified employee pension), SIMPLE plan [IRA or 401(k)], or other qualified
plan. Contributions made to a plan for company employees can be deducted by the employer
(which means via Schedule C if one is self-employed). An employer, who is a sole proprietor, can
deduct contributions made on his or her behalf, as listed on Schedule 1 (Form 1040), line 16. Any
additional trustee fees not covered by the plan would also be deductible. Earnings on the
contributions will not be taxable until the taxpayer begins receiving distributions from the plan.

SEP (Simplified Employee Pension)

This type of pension plan must be codified in writing. Self-employed taxpayers will be permitted to
contribute to their own retirement as well as to their employees' retirement. This plan removes the
difficulties inherent in setting up a much more complex qualified plan. The taxpayer (employer)

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contributes funds to a traditional individual retirement arrangement (referred to as a SEP-IRA). To
do this, a SEP-IRA account must be established for each eligible employee at an eligible financial
institution. Each eligible employee will own and control their account at the designated financial
institution. The taxpayer (who is the employer, after all) will then send contributions for each
employee to the financial institution to be deposited into each employee's SEP-IRA account.

Student Note: This plan has already been discussed in a preceding chapter. Please refer
to Chapter 7 or Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and
Qualified Plans), (included in your Reading References) for more details.

SIMPLE IRA
A SIMPLE plan is a tax-favored retirement plan that certain small employers (with 100 or fewer
employees who earned $5,000 or more) can set up for the benefit of their employees. There are
no beginning age requirements that must be met to participate in a SIMPLE plan. Self-employed
individuals can also set up a SIMPLE Plan.

A SIMPLE plan is a written agreement (salary reduction agreement) between the taxpayer and their
employer that allows the taxpayer to choose to:
• Reduce their compensation by a certain percentage each pay period.
• Have the employer contribute the salary reductions to a SIMPLE IRA or SIMPLE 401(k)
plan on their behalf. These contributions are called salary reduction contributions.
• Have the SIMPLE IRA's assets moved from one SIMPLE IRA to another.
• Invest the SIMPLE IRA plan contributions into mutual funds, individual stocks, or similar
types of investments.

Student Note: This plan has already been discussed in a preceding chapter. Please refer
to Chapter 7 or Publication 560 for more details.

Qualified Plans
These retirement plans are also known as Keogh or H.R. 10 plans (this indicates the legislation
that originally created these plans). These plans can be set up by sole proprietors, partnerships
(but not individual partners), as well as corporations. The plans can cover self-employed persons,
such as a sole proprietor, partners, as well as regular (common-law) employees. The plan is set
up to benefit the employees and their beneficiaries.

The employer can deduct contributions, within certain limits, made to the qualified retirement plan
for both their employees and the owners.

The qualified plan rules are more complex than the SEP or SIMPLE plan rules. There are two
kinds of qualified plans – defined contribution and defined benefit. A defined contribution plan is
one where an individual account is set for each person in the plan. The benefits received by the
participant will be dependent on contributions and asset growth. Thus, the benefits received by
each employee are not determinable in advance.

On the other hand, a defined benefit plan is one where contributions are made to the plan to provide
determinable benefits to plan participants. These plans are extremely complex and difficult to
maintain.

Distributions from a qualified plan are usually fully taxable because most recipients have a zero-
cost basis in the plan. However, if the taxpayer has an investment (cost) in the plan, the pension
or annuity payments from the qualified plan are taxed using the Simplified Method.

Copyright © 2022, The Income Tax School, Inc. – All Rights Reserved Page 8.14
 Student Note: Due to the advanced nature of the Keogh plan, this subject will not be
covered further in this course. The information is provided only to assure that students have
an awareness of the topic. Additionally, these plans have already been discussed in a
preceding chapter. Please refer to Chapter 7 for details. Should the student find that more
information regarding this topic is necessary, the student should refer to Publication 560.

Where to Deduct Contributions

Taxpayers who are sole proprietors or partners may deduct contributions for themselves on line 16
of Schedule 1 (Form 1040). (If the taxpayer is a partner, contributions are shown on the Schedule
K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., as received from the
partnership.) The deductions for the employees would be entered on the respective business
return on the appropriate line for retirement deductions.

6
17 Self-employed health insurance deduction . . . 17 12

Exception for Retired Public Safety Officers

An eligible retired public safety officer (law enforcement officer, firefighter, chaplain, or member of
a rescue squad or ambulance crew) may exclude distributions made from an eligible retirement
plan from income if the distribution is used to pay the premiums for accident or health insurance or
long-term care insurance. These premiums can cover the taxpayer, the spouse, and/or
dependents. The insurance provider must receive the distribution directly from the plan. The
insurance premiums, up to a maximum of $3,000, may be excluded from income. This election is
only applicable for amounts that would otherwise be included in one's income. Any amount
excluded from income cannot be used to claim a medical expense deduction.

Individual Retirement Arrangement (IRA) Deduction

These personal savings plans allow individual taxpayers to make tax-advantaged contributions for
retirement or education expenses. This personal savings plan is known as an individual retirement
arrangement or IRA. The different types of IRAs include traditional, Roth, SIMPLE, or education
IRAs.

Almost any individual with taxable compensation may contribute to a traditional IRA, provided
certain conditions are met. Compensation for IRA purposes includes wages, salaries,
commissions, tips, professional fees, bonuses, and other amounts received for personal services.
Taxable alimony and separate maintenance payments may be included in income. Compensation
does not include rental income, interest and dividend income, or any amount received as pension
or annuity income, or as deferred compensation.

As discussed in Chapter 7, the contribution rules for traditional IRAs have changed as a result of
the SECURE Act being signed into law. In the past, taxpayers could only make traditional IRA
contributions until they reached age 70½. For tax years beginning after December 31, 2019,
taxpayers can continue to make IRA contributions beyond the age of 70½.

12
2021 Schedule 1 (Form 1040), page 2

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The deductible amount of the traditional IRA contribution may be limited depending on two factors:
1. Whether the taxpayer or spouse had an employer-provided pension plan; and
2. The amount of the taxpayer’s modified adjusted gross income (MAGI).

To determine whether a taxpayer qualifies for an IRA deduction, use the related charts which follow.
Note that the amount of the adjusted gross income allowed varies based on the filing status, as
well as whether the taxpayer/spouse is covered by a pension plan.

The maximum amount a single taxpayer can contribute is the smaller of $6,000 or his or her taxable
compensation. If the taxpayers are married, and only one spouse has taxable compensation, the
maximum contribution the couple can make is $12,000. The maximum which can be contributed
to one account is $6,000. If the married spouses both have compensation in excess of $6,000
each, they each may contribute $6,000. The following chart explains these deductions.

If the taxpayer is age 50 or older, they may make an additional $1,000 "catch up" contribution to
their IRA account. The taxpayer may not contribute more than $7,000 to an IRA account during
the tax year.

See the following table to help determine the maximum IRA contribution allowed.

Maximum IRA Contribution Limits

Maximum
Taxpayer's Filing Status
Contribution
Single (under age 50) $ 6,000
Single (50 years old or older) $ 7,000
Married Filing Jointly (both spouses are under age 50, and only one
$12,000
spouse has taxable compensation)
Married Filing Jointly (one spouse is age 50 or older, and only one
$13,000
spouse has taxable compensation)
Married Filing Jointly (both spouses are age 50 or older, and only one
$14,000
spouse has taxable compensation)
Married Filing Jointly (both spouses are under age 50, and both spouses
$12,000
have taxable compensation)
Married Filing Jointly (one spouse is age 50 or older, and both spouses
$13,000
have taxable compensation)
Married Filing Jointly (both spouses are age 50 or older, and both
$14,000
spouses have taxable compensation)

Taxpayers may make contributions up to the maximum amount indicated in the above table without
penalty. Contributions must be in the form of money – property cannot be contributed. The
taxpayer may make contributions until his or her tax filing deadline (not including extensions), which
is generally April 15th of every year. If a taxpayer contributes more than $6,000 ($7,000 if age 50
or older) in any given year to an IRA, a 6% penalty will be issued on the excess contribution and
its earnings each year (at the end of the year) until the excess contribution and its associated
earnings are withdrawn from the account. This penalty is not limited to the year in which the excess
contribution is made. The excess contributions must be reported to the IRS via Form 5329, Part
III, “Additional Tax on Excess Contributions to Traditional IRAs,” or Part IV, “Additional Tax on
Excess Contributions to Roth IRAs.”

In addition to the adjustment to the taxpayer's gross income, interest earned on a traditional IRA
account accumulates tax deferred until it is withdrawn, thus benefiting the taxpayer in multiple
ways.

Copyright © 2022, The Income Tax School, Inc. – All Rights Reserved Page 8.16
If the taxpayer is covered by a retirement plan at work, the following table is employed to determine
if the modified AGI affects the amount of the potential deduction. The IRA deduction is reported
on line 20 of Schedule 1 (Form 1040). The table reflects numbers for the 2021 tax year.

Table 1-2. Effect of ModHied AGl1 on Deduction If You Are Covered by a Retirement Plan at
Work
If you are covered by a retirement plan at work, use this table to determine if your mod;fied AG/ affects the amount of
your deducllon.

IF you r fili n g status i s •.• ANO you r modified AGI is ... THEN you can take•..
$66,000 or less a full deduction.
s ingle or more than $66,000
a partial deduction.
head of household but less than S76,000
$76,000 or more no deduction.
$ 105,000 or less a full deduction.
marri ed fil ing j o intly or more than S105,000
a partial deduction.
qualifying widow(er) but l.e ss than $125,000
S125,000 or more no deduction.
less than $ 10,000 a partial deduction.
married fil ing separately•
$ 10,000 or more no deduction.

1 Modified AGI (adjusted gross lncome). See Madifledad/usted gross income (AG/J. earlier.
2 11 you didn't l ive with your spouse at anytlme during the year, y·our filing status Is considered Single for this purpose (therefore, your IRA deduction
is determinad under the "Single" filing status). 13

Student Note: If the taxpayer is covered by a retirement plan at work, box 13 (Retirement
Plan) should be checked on the taxpayer's Form W-2, which one receives from their
employer.

If the taxpayer is not covered by a retirement plan at work, use the following table to determine if
the modified AGI affects the amount of their deduction. The table reflects numbers for the 2021
tax year.

Table 1-3. Effect of Modified AGl1 on Deduction If You Aren 't Covered by a Retirement Plan
at Work
If you aren't covered by a retirement plan at work, use this table to determine if your mod;fied AG/ affects the amount of
your deduction.

I F your fili ng status is•.. ANO your modified AGI is... THEN you can take •..
single,
head of household , o r any amount a fu ll deduction.
qualifyin g widow(er)
married fil ing jointly or separately with a
spouse who isn't covered by a p lan any amount a fu ll deduction.
at work
$198,000 or less a fu ll deduction.
married fil ing jointly with a spouse who is more than S198,000
a partial deduction.
covered by a plan at work but less than $208,000
$208,000 or more no ded uction,.

married filing separately with a spouse who is less than $10,000 a partial deduction.
covered by a plan at work' $10,000 or more no ded uction.

' Modified AGI (adjusted gross lncome). See MQdifled acffliltffld QCP$$ jQCQIP(l fAGI>. lat~ .
2 You are entitled to the lull deduction II you didn't nve wlth you r spouse at any time dlJring the year. 14

13
2021 Publication 590-A, page 13
14
2021 Publication 590-A, page 14

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Modified AGI
Modified AGI is the adjusted gross income as indicated on Form 1040, line 11, as "modified" by
adding back certain preference items. Modified AGI is computed as follows:

Modified Adjusted Gross Income for Traditional IRA Purposes

e this worksheet to figure your modified A GI for traditional IRA purposes.

11. Enter your adjusted gross income (AGI) from Form 1040, 1040-SR, or Form 1040-NR,
line 11, figured witho ut taking into account the amount from Schedule 1 (Form 1040),
line20 . . . ... . .. .. .. ...... . .. .. . . . . . . . . . ... . . . . ... . ... . .. .. .. .. .. . ... . 1.
2. Enter any student loan interest deduction from Schedule 1 (Form 1040), li ne 21 . . . ... . 2.
3. Enter any foreign earned income ex.clus.ion and/or housing e.xcl usion !Tom Form 2555 ,
line 45 . . . ... . .. .. .. . . . . . ... . .. .. .. . . .. . ... . . . . ... . .. . . 3.
4. Enter any foreign housing deduction from Form 2555, li ne 50 . . ... . 4.
5. Enter any excl udable savings bond interest from Form 8815 , line 14 5.
6. Enter any excl uded employer-provided adoption benefits !Tom Form 8839 , li ne 28 6.
7. Add li nes 1 through 6. This is your Modilied AGI for traditional IRA purposes . .. . 7.
15

The taxpayer cannot deduct elective deferrals made to the following plans:
• 401(k) plan
• Federal Thrift Savings Plan (TSP)
• Section 403(a) plan
• Section 403(b) annuity
• Section 403(b) plan (Note that a Section 403(b) plan is not an IRA.)

Elective deferrals are amounts contributed to a plan by an employer at the request of the employee.
If the taxpayer makes this election, reduce the otherwise taxable amount of the pension or annuity
by the amount excluded. The amount shown in box 2a of Form 1099-R does not reflect this
exclusion. Report the total distributions on Form 1040, 1040-NR, or 1040-SR, line 5a. Report the
taxable amount on Form 1040 or 1040-NR, line 5b. Enter "PSO" next to the appropriate line on
which the taxable amount is reported.

15
2021 Publication 590-A, page 15

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The worksheet that follows is used to calculate the deductible and nondeductible portion of an IRA
contribution for 2021.

IRA Deduction Worksheet- Schedule 1, Line 20

Before you begin: ./. Be sure yo u have read the JO-item list in the instructions for this line. You may not be a ble to use this worksheet.
:/ Figure any write-in adj ustments to be entered on Schedule I, line 24z (sec the instructions for Schedule I,
line 24z).
✓ If you arc married fi hng separately and you lived apart from your spo use fo r all of 202 I, enter " D" on the dolled
line nex t to Schedule I line 20. lf vou do n't vou mav get a math error notice from the IRS.
Your IRA Spouse's IRA
la. Were you covered by a re tirement p lan (sec Were You Covered by a
Retirement Pfa11)'/ .......... . la. D Yes D No
b. If married tilingjointly, was your spouse covered by a retirement plan? l b. D Yes D No
NexL If you checked "No" on line la (and " No" on line lb if married tiling

l
jointly). ski p Imes 2 through 6, enter the applicable amount below on line 7a
(and lmc 7b, ,fapphcab le). and go to lme 8.
• $6,000, if under age 50 at the end of202 l
• $7,000, if age 50 or older at the end of 2021.
Otherwise, go to lme 2.
2. Enter the amount shown below that app lies to you..
• Single, head of household, or married filing separately and you
lived a part fro m yo ur spouse fo r a ll of 2021 , enter 76,000.
• Qualifying widow(er), enter $125,000. la. l b.
• Mamed fi hngjoinUy, enter $ 125 ,000 in both columns. But ,fyou checked
" No" on either Tine Ia or I b, enter 208,000 for the person who wasn' t
covered by a p lan.
• Mamcd fi lmg separately and you lo ved with your spouse at any ti me m
2021 , enter 10,000.
3. Enter the amount from Forrn 1040 or I 040-SR.,
line 9 . . . . . . . . . .......... . 3.
4. Enter the total of the amounts from Schedule I,
lin<:s 11 through I9a, plus 23 a nd 25 . 4.
5. Subtract lmc 4 from line 3. If married tilingjointly, enter the result m both
co lumns . . . . . . . . . . . . . . . . . . . . . . ...................... . 5a. Sb.
6. Is the amoun t on line 5 less than the amo unt on line 2?
D
' '· O
Nt
O None of your IRA contributions arc deducti ble. For details on
nondeductib le IRA contn buhons, see Forrn 8606.

Subtract line 5 from line 2 in each column. Follow the instruc tion
b<:low that appl ics to you.
• If single, head o f household, or married fi lmg separately,
and the result is I 0,000 or more, enter the applicable
amount below on li ne 7 for that column a nd go to line 8.
i. $6,000, ,f und<:r age 50 at the e nd of 2021.
ii. $7,000, ,f age 50 or older at the
end of202 1.
If the result ,s less than I0,000, go to line 7. 6a. 6b.
• If married tilingjointly or quahfymg widow(cr), and the
result is $20,000 or more ( 10,000 or more in the column
for the IRA of a person who wasn't covered by a
re ti rement plan), enter the appl icable amoun t be low on
!me 7 for that co lumn and go to h ne 8.
i. $6,000, ,f und<:r age 50 at the e nd of 2021.
ii. $7,000 if age 50 or older at the
end o f 202 1.
Otherwise, go to line 7.
16

16
2021 Form 1040 Instructions, page 92

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 IRA Deduction Worksheet-Continued
Yo ur IRA Spouse's IRA
7. Mu lllply lines 6a and 6b by the percentage below tha t appli es to you. If the
result isn't a multiple of$10, increase it to the next multiple of$ 10 (for
example, increase $490.30 to $500). If the re ult is 200 or more, enter the
result. But if it is less than 200, enter $200.
• Single, head of household, or married fi ling separately, multiply by 60%
(0.60) (orby 70% (0.70) in the column for the IRA ofa person who 1s age
50 or older at the end oi202 l ).
• Married litmgjointl y or qualifying widow(er), multiply by 30% (0.30) 7a. 7b.
(or by 35% (0.35) m the column for the IRA of a person who is age 50 or
older at the end of2021). But if you checked "No" on either lme l a
or lb, then m the column for the IRA of the person who wasn't covered by a
retirement plan, multiply by 60% (0.60) (or by 70% (0.70) 1fage 50 or
older at the end of 2021 ).
8. En ter the tota l of your (and your spouse's if filing
Joi ntly):
• Wages, salaries, ti ps, etc. Gencra.lly, this is the
amount reported m box I of Form W-2 . Exceptwns
arc explained earl ier in these instrucuons for line 20. 8.
• Alimony and separate maintenance paymen ts
reported on Schedu le I, lmc 2a.
• ontaxable combat pay. This amount should be
reported m box 12 of Forrn W-2 with code Q.
9. En ter the earned income you (and your spouse if
filmgjomtly) received as a self-employed individual
or a partner. Generally, this 1s your (and your
spouse's if fitingJoin tl y) net earnings from
sclf-cmfloymcnt 1f your personal services were a
materia income-producing factor, minus any
deducuons on Schedule I, Imes 15 and 16. lfzero or
less, enter -0-. For more details, sec Pub.
590-A . . . . . . . . . . . . . . . . . . . . . . . . 9.
ltl. Add lines 8 and 9

m
IO.

Ifmarried filingjoimly a11d line JO is less than $/ 2,000 ($/ 3, ()(JO if

011espo11se is age_ 50 or older at t/,e end of 20. / ; $14,000 if both
spo11ses are age JO or older at the end of 202 i ) , stop here and use
the worksheet in Pub. 590.A to figure y our IRA ded11ctio11.

I I. En ter traditional IRA contr1buuons made, or that w,11 be made by the due date
of your 202 1 re turn not cou nting extensions (Apn l 18, 2022, for most people),
for 2021 to your IRA on line 11 a and to your spouse's IRA on line 11 b . . I l a. _ _ _ _ _ _ li b.
12. On line 12a1cntcr the smallest of line 7a, 10, or I la. On line 12b, enter the
smallest of inc 7b, 10, or I lb. This is the most you can deduct. Add the
amou nts on lines 12a and 12 b and enter the total on Schedu le I, hnc 20. Or, 1f
you want, r.ou can d~u~t a smaller amount and treat the rest as a
nondeductible contn buuon (sec Form 8606) . . . . . . . . . . . . . . . . . 12a. _ _ _ _ _ _ IZb.

17

Example: Kenneth (age 51) and Rachel (age 46) are married and will file their return this
year with the status Married Filing Jointly. Kenneth is not covered by a retirement plan at
work; he contributed $3,000 to a traditional IRA. Rachel is covered by a retirement plan at
work; she contributed $5,000 to a traditional IRA.

Information you will need from the return includes:

Total wages from line 1 of Form 1040 $95,420
Total income from line 9 of Form 1040 $99,420
Total of lines 11 through 19a, plus 23 and 25 of
Schedule 1 (Form 1040) $450

Please see the completed worksheet with comments on the following pages.

17
2021 Form 1040 Instructions, page 93

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 Kenneth and Rachel Example Continued

Deduction Worksheet- Schedule 1, Line 20

Before you begin: J. Be sure you h#\'C read the 10..1lcin Issi 1n the 1nstruct1ons for 1h1s hnc Vou may not be .able 10 1.1sc this 1A'Orkshcet,
-:/ Figure any v.ritc,.m adJUSlfm.~nts 10 be entered on Schedule I, tine 241, (see the instruct1on.s for Schedule I.
line 24z).
J line
If you flfl! married filing sep;ara.tcr, and~u li••cd opan. from your spouse for all of 2021 , emcr .. D.. on the dolled
next to Schedule 1 hnc 20. I ·vnu n ·1 vou mav !!.Cl a math error nohcc from the IRS .
Your IRA Sp,ou,t's IRA
h. Were )'OUCQVcrcd bya n.."l1rrment plan (s« Wer~ l'ouCow•nd bya
Ret1renu:nl Plan)? . .•. . ...••... . •.. . •. . .• . .• . .•• . ••. . •. . .• . .. . .. ,.. □ \ ' t, IBJ No
b. If married filing jointly. was your spouse covered by a rcuremcnt plan? lb. IBJ Ye< 0 No
t'itxt. lf)'(MJ checlu..-d "N'o.. on hne la (and " No'· onhne l b 1fmamed tiltn~
JOintlr.), skip hncs 2 through 6, enter the applicable amount below on line a
(and inc J8b1fapphcable), and golo lme 8 In the example, Kenneth is the taxpayer
• $6, , ,f undc."I' age SO at lhc end of2021. (Column A), and Rachel is the spouse
• $7,000, 1f atc SO or older a11hc end of202I
Olhcrwi.sc-, go to ine 2. {Column B). KEEP in mind. Kenneth is age
S1 and does not have a retirement plan at
2. Enter the ainoun1 shown below lhat apphes to you.
work.
• Single. hc3d of household, 0t married fihng separatel)' and you
frnd apart from your spouse for all of 2021 , entcT $76,000.
• Quahfying w1dow(cr), entcr $125,000.
1 • Mamco 11unf,JOtnl1)', enter., ,.,.,_. ~ 1n_!:}O_tn co1unms, nut II you "':'0\--c-xc.."(I
..No"' on either 1ne ln or lb, entc..-r $208,000 tor the perSon who wasn't
covered bu a nlan
• M11.mea h11.ng~ro.te1y ana you IIVM With your SpouSl' ll any 11~ 1ft
1/ 208 000 lb. 1~5 !:!!2Q

2021 . cntetSl0. .
J. Enter the amount from Fonn 1040or 1040.SR,
line9 ... . • . ... . ... . ....• . .....• . .. . .• . J. 99,420
4. Enter chc toul of the a1nounts from Schedule I,
line$ 11 through 19a, plus 23 and 2S .....•.... 4. 450
5. Subtta<:t hoe 4 from line l . lf mamcd lilmgJomtly. enter lhc resuh an bo(h
colum1,s . , • , . •. . •. . . 5•. 98,970 Sb. 98,970
6.
□ No. e
Is lhc amounl on hnc S less than the amounl on lioc 2?
Nooe of your IRA contnbutions arc deductible:. For dcta.ils on
nondeductible IRA contnbut1ons. sec Fonn 8606.
Since the amount on line S is less than the
amooot on line 2, "yes'" should be cheded
for line 6. Then, wbtraa the amounts on
line 5 from the amounts on line 2.. Note:
Iii y..,_ Subtmct line 5 (mm hnc 2 m each colwnn. FoUow the mslruchon
below lhat applies 10 )'OU the amount on i ne 6a for Kenneth is more
• Itsingle, ht-ad of household. Of marncd min! ~fi':ra1cly, than S1D,CX>O, so S7,00D is entered on Line
and lhc result lS S10,000 or more, enter !he app 1ca le 7a.
ainount below on line 7 for that column and go to hne 8.

I
i. $6,000, 1funder-agc SO al the end of 2021 .
ii. $7 ,000. if age 50 OC' old« lll the
end or202J.
If the result 1$ ICSS lhan SI0,000, go 10 lmc 7. 109 030 6b. 26 0 30
• If mamed tibngjOtnlly orquahf~mg widow(C'l), and lhc
result is $20,000 Of more ($10,000 or more in Lhe column
for the. IRA of a person "ho wasn"t CO\'crtd a bb I/
rc11rcmcnian). cncer the applicable amount clow on
hue 7 for t column and go 10 bnc 8.
i. S6.000. 1funder age SOac 1he cndof2021
ii.~000 irage 5,0 or o lder at the
of2021.
vu--.'TWISC, go lo nnc ,.

Copyright © 2022, The Income Tax School, Inc. – All Rights Reserved Page 8.21
 Kenneth and Rachel Example Continued

Ded uction Work sheet-Continued

\'our IRA Spoust'I IRA
7. Multiply lincs6a and 6b by the percentage below that appl,esto you. 1rthc
rcsuh isn't a multiple ors 10, increase i1 to the next multiple ors10 (for
cx:tmplt, inctcaSe $490.30 ro SS00). If lhc rcs:uh 1s S200 or more, enter the
result But if 11 is less than S200, enter S200.
• Single, head of household. or mamed fihng separately, muluplfu)by 60'/o
(0.60)(orby 70% (0.70/ in'lheoolumn for lhe IRA ofo persoo w ,sage
50 or older a11he end o 202 ll.
• Mamcd fihnJJoint~ or ~ualifymg w,do"{cr), multiply by 30"/4 (0.30) 1•• 7000 7b. 6,000
(orby 35% (0. 5/ ,n e co umn for the IRA of a person \\ho ,sage 50 or
older at the end o 2021). But 1f)'.oochcckcd "No' on either hnc l a

~
or lb, then m lhc column for the IRA of the rvrson
who wa_.:;n't co,cn..-d by :t The amounts on Jine 7 ar e the contribution
rc11rtmcn1plan, mulllf'Y br 60%(0.60) (or y 70"/4 (0.70) 1f ago 50 or deduction limits based on the tine 6
older at the end of20 I)
instructions. Kenneth and Rachel are both
8. Enter lhc twl of your (and your $J>OUSC's 1f tiling
JOinlly): oyer their applk able amounts; t herefore,
• Wages. salaries, tips., etc. Generatz, this is the the IRA deduction lim its on line 7 are the

l
a.mount rep0ttcd m box I of Form\ -2. Exeefft1ons maximum allowed for each.
3rc explained earlier in t hese instnictions for inc 20 8. 95,420
• Alimony and sepanuc maintenance paymentS
reported on Scl,tdule I, line 2a.
• Nontaxable combat pay. This a.mount should be
rcp0rtcd m box 12 offonn W-2 withoodeQ.
9. Enter the earned mcome you (and your spouse 1f
filuigJointly) received as a self-employed individual
or a panne:r. Gencrallj'• this 1s your (and your
$~se·s if fihngJoint y) ncl earnings from
sclf-i:mrloymcnl tf your pe~nal services were a
matcna income-producing faclor. minus any
deduetionson Schedule 1,-lincs 15 and 16. ff zero or Kenneth contributed $3,COJ {line 11a),
It':$$, enter -0-. For more details, sec Pub. and Rachel contributed $5,000 (line
590-A ••• . •••.•••••.•••.•• . •••••••.• , ••• 9. llb). They are aflowed an IRA deduction
10. Add lines 8 and 9 .......... .. ... . ........ . 10. 9 5,420 of $8,0CXI on Schedule 1, line 20.

11.
m lfmarriedji//1,gJoim/yond line JO Is Im than SIUJO(!(SIJ,IKX/if
on~ .spouse Is age 50oro/llera1 tire end o/1011: SJ.J.000,Jbotlr
spo11scs ant age 50 or older at the e11d of101J). Slop hur and use
tl,e worhheet in Pub. 590-A to figure your IRA dcd11ction.
Enter undioonal IRA conlnbutions made. or 1ha1 will be m3dc by the due date
of~ 2021 return not counting extensions (Apnl 18. 2022, ror most people),
for 2021 to r IRA on hn.c I la and to ours ousc's IRA on line I lb . . .. . __ _0_ _ llb.
3.~00 5,000
12. On hoc 12a, cnte:r1hc smaltest of hnc 7a. 10, or I la. On lmc 12h. cntcr the
smallest of line 7b, 10. or I lb, This IS the most you can deduct. Add lhe
amounts on lines 12a and 12b and enter the totaf on Schedule I, line 20. Or, 1
you want,. ~ can ck'Cluct a smaller amoUl'lt and treat the rest as a
nondeducttblc contribution (sec Form 8606) . . . . . . . . . . . . . . . . . . . . . . . . . J 2a. - ~3=0=0~
0- llb. 5,000

Copyright © 2022, The Income Tax School, Inc. – All Rights Reserved Page 8.22
Using Form 8606 to Report Nondeductible IRA Contributions
Taxpayers whose deductions for IRA contributions are reduced or eliminated can still make
contributions of up to $6,000 ($7,000 if 50 or older). The interest earned on the nondeductible
portion is tax-deferred until it is withdrawn from the account. Nondeductible contributions must be
reported on Form 8606. If the taxpayer makes a nondeductible contribution in a year when they
do not meet the threshold for filing a tax return, Form 8606 must still be filed to report any
nondeductible contributions.

When contributing to an IRA, the taxpayer will either be eligible for a full deduction, partial
deduction, or no deduction on the tax return. Any year the taxpayer does not receive a full
deduction, then the nondeductible portion of the contribution will become the basis. The
nondeductible amount along with the basis from prior years will be reported on Form 8606,
Nondeductible IRAs.

Once a taxpayer has an established basis, Form 8606 must then be filed each year to keep track
of that basis, even in years the contribution is fully deductible. The taxpayer needs to keep track
of his or her basis. Once the taxpayer begins taking distributions from the account, part of the
distribution will be nontaxable. That portion of the distribution is considered a return of one’s basis
and is not a taxable distribution.

Use Form 8606 to keep track of deductible and nondeductible contributions and the basis of
taxpayers' IRAs. Taxpayers who make nondeductible contributions must file Form 8606 with their
tax returns. This form is also used to report taxable distributions from an IRA. The worksheet in
this text will help the tax preparer determine how Form 8606 should be filled out. The Instructions
for Form 8606 are available in the online Reading References.

Practice Note: A taxpayer’s basis in traditional, SEP, and SIMPLE IRA is the total of all his
or her nondeductible contributions and nontaxable amounts included in rollovers made to
the IRAs, less the total of all nontaxable distributions.

Copyright © 2022, The Income Tax School, Inc. – All Rights Reserved Page 8.23
 0MB No. 154S-0074
8606 Nondeduct ible IRAs
► Go to www.lrs.gov/ Form86C6 tor k'lstruetlons and the late-st W onnatlon.
► Attach to 2021 Form 1040, 10il0-SR, or 1040-NR
No1ffle. lfnwvried, lie a. ~ e lorm for och spouse reqused to rile 2021 Form 8606. See inwuc:tions. IYour social sec:ur~ nunibef'

~
Home ~ f!UN>CI' ~d street. 0f PO box if mail 1s not deivered to )'0'llf lv:ln-e) Apt. no.
FIii in Your Add ress
Only if You Are . .
F ili.ng This For m by Crty. town Of post offic:e, st:lte. and ZIP code ff you ha.ve a ~ llddres;s,. also con-.,IC'le the sp,xes below (see 1nwuctions).

Itself and Not With

Your Tax Return Foreign COU'ltry nmne I
Fore9' pn:w1~ o o u nty IForeign post.ill code

K.1111111 Nondeductible Contributions to Traditional IRAs and Distributions From Traditional, SEP, and SIMPLE IRAs
Complete this part only if one or more of the following apply.
• You made nondeductible contributions to a traditional IRA for 2021.
• You took distributions 1rom a ttaditional, SEP. or SIMPLE IRA in 2021 and you made nondeductible conttibulions t o a
traditional IRA in 2021 0t an eartier year. For this purpose, a distribution does not include a rolover (othe1 than a
repayment o l a q ualifl8d disast er distribution (see 2021 Focms 8915-0 and 8915-F)), q ualified charitable distribution.
one-time d istribution to fund an HSA. conversion. recharact erization. or return of cert.ah contributions.
• Youconvetted part. but not all, of your traditional, SEP. and SIMPLE IRAs t o Roth IRA.sin 2021 and you made
nondeductible conllibutk>ns to a tiaditional IRA in 2021 or an earlier yea:t.
1 Enter yoLW nondeductible oonllibutk>ns to traditional IRAs foe 2021, including those made for 2021
trom January 1. 2022. through April 18, 2022. See instructions 1
2 Ent er your total basis in traditional IRAs. See instructions 2
3 Add lines 1 and 2
rn 2021, dKI you take a d;s tribuUon
from traditional, SEP, cw SIMPLE IRAs,
• L No -
Ente1 the amount from tine 3 on line 14.
Do not complete the rest o1 Part I.
3

or make a Roth IRA convers.ion? Yes

-
Go t o line 4. ,_
4 Ent&i those contributions incl.Jded on line 1 that were made from January 1. 2022, through AprU 18. 2022 4
5 Subtract line 4 from line 3 5
6 Ent er the value o l all your traditional. SEP. and SIMPLE IRAs as of December
3 1, 2021. plus any outstanding rollovers. Subtract any repayments of qualified
d isaster d istributions (see 2021 Forms 8915-0 and 8915-F} 6
7 Ent8I yo1.r distribut ions trom traditional SEP. and SIMPLE IRAs in 2021 . Do not
inch.de roltovets (othe, than repayment s ol qualified dis.aster distributions (see
2021 Forms 8915•0 and 8915•F)), qualifted charitable distributions, a on&-tffle
d istribution to fund an HSA, conversions to a Roth IRA, cectain returned
contributions. ., recharacterizat ions of traditional IRA contributions (see
instn.ctions) 7
6 Enter the net amount you converted from traditional SEP, and S.MPLE IRAs to
Roth IRAs in 2021. Also. enter this amount on line 16 6
9 Add lines 6. 7, and 8 s I ·1
10 Divide line 5 by tine 9. Enter the result as a decimal rounded t o at least 3
p laces. If the result is 1.000 or more. enter · 1.000" 10 X
11 Multiply line 8 by lne 10. This is the nontaxable portion of the amount you
converted to Roth IRAs. Also, enter this amount on line 17 . 11
12 Multiply line 7 by line 10. This is the nontaxable portion of yoLW distributions
that you d id not convert to a Roth IRA 12
13 Add lines 11 and 12. This is the nontaxable portion of all your d istributions 13
14 Subtract tine 13 from line 3. This is your total basis in traditional IRAs for 2021 and earlier years 14
15a Subtract tine 12 from line 7 15a
b Enter the amount on line 15a attributable t o qualified d isast&I d istributions from 2021 Forms 8915-0
and 8915-F (see instructions). Also. enter this amount on 2021 Focm 8915-0. line 23: or 2021 Form
8915-F. line 18, as applicable 15b
C Taxable amount. Subllact lne 15b 1tom tine 15a. U more than zero. also inctude this amount on 2021
Form 1040, 1040-SR. or 1040 -NA. line 4b 15c
Note: You may be subject to an additional 10 % tax on the amount on line 15c if you weie under age
59½ at the time of the distiibutk>n. See instructions.
For Prtvaey Act and Paperwortt Reduction Act Notice. see separate Instructions.
I
Forrn 8606 (2021}
Cal No. 63966F

Copyright © 2022, The Income Tax School, Inc. – All Rights Reserved Page 8.24
 rm 8608 (2021}
2021 Conversions From Traditional, SEP, or SIMPLE IRAs t o Roth IRAs
Complete this part if you oonverted part or all of yoLW traditional SEP and S,MPLE IRAs to a Roth IRA in 202 1
16 If you completed Part I. enter the amount from line 8. Otherwise. enter the net amount you converted
1rom traditional, SEP, and SIMPLE IRAs to Roth IRAs in 2021 16
17 If you completed Part I, enter the amount from lne 11. Otherwise, enter your basis in the amount on
line 16 (see instructions) 17
16 Taxable amount. Subtract line 17 from line 16. U aiore than zero, also include this amount on 2021
Form 1040, 1040-SR. or 1040 -N A. line 4b 18
. Distributions From Roth IRAs
Complete this part only if you took a d istributkfl from a Roth IRA in 2021. Foe this purpose, a distribution does not in.:;,lude
a rollover (other than a repayment of a quali!ied disast er disttibut ion (see 2021 Forms 8915-0 and 8915-F)). q ualified
charitable disttibut ion. one-time distribut ion to fund an HSA, recharacterizat ion. oc return of certain contributions (see
instructions).
19 Enter your total nonquatified distributions from Ro!h IRAs in 2021, including any q ualified firsHime
homebuy&I distributions. and any qualified d isaste1 d istributions (see instructions). Also, see 2021
Forms8915-0 and 8915-F 19
20 Qualified fW'st -t ime homebuyer expenses (see instructions). Do not ente1 more than $10.000 reduced
by the total of all your prior qualified first -time homebuyer d istributions 20
21 Subtract line 20 from line 19. If zero or less, enter -0- 21
22 Ent er your basis in Roth IRA contributions (see instriJctions). If Ille 21 is ze10, stop here . 22
23 Subtract Ille 22 1rom tine 21. U zero or less, enter -0- and skip tines 24 and 25. If more than ze10, you
may be subject t o an additional tax (see instruction!) 23
24 Enter your basis in conve1sions from tradit ional. SEP. and SIMPLE IRAs and rollove1s from qualified
retirement plans t o a Roth IRA. See instructions 24
25a Subtract line 24 from line 23. If zero or less, enter -0- and skip Illes 25b and 25c 25a
b Enter the amount on line 25a attributable t o qualified d isast&I d istributions from 2021 Forms 891S-0
and 8915-F (see instructions). Also. enter this amount on 2021 Form 8915-0, line 24; or 2021 Form
8915-F. line 19, as applicable 2Sb
C Taxable amount. Subtract lne 2!ib 1tom line 2:,a. u more than zero. also lnctude this amount on 202 1
Form 1040, 1040-SR. or 1040-N A. line 4b 25c
Sign Here Only if You Unclef pe,illlfe s ot po!jlry, I dec:We Iha I hl.ve eumined Ibis form. inducing ;,ccornp!Sl'l)ing ;,ttllClments. a,d lo !he best ot ffl'f ~ 1111d
beliet, it is trua. oc,rrect. Md 0011."f)1c!!e. Oecliuafic,n ol preplllet folher Iha, 13Xp!Syel) is b-1'5ed on all irlom.,afic,n d ,.hict, prepaw hH.,, lu'oo-lMdga.
Ate Filing This Form
by ltseff and Not Wtth
Your Tax Return ► ► O;,te
Paid
Print/Type ~
Your sign:iture
s n:une I Prep:nr"s si9m1Wre:
I""' Check D
if P11N
self-em~ed

-=·
Preparer Firm'srwirne ► Fffll'sEJN ►
Use Only
Firm's lll:lch,ss ►
Fomi 8606C2Q21)

Early Withdrawal Penalty

Taxpayers who are under 59½ are subject to an early withdrawal penalty of 10% if they withdraw
money from their IRA. In addition to the penalty, the withdrawn funds are included in income and
subject to being taxed. See exceptions to the 10% penalty in Chapter 7 of this manual. Early
withdrawal penalties are reported on Form 1040, Schedule 2, line 8.

Roth IRAs
Although contributions to a Roth IRA are never deductible, a discussion of it is appropriate since
taxpayers will be attempting to decide which type of IRA account will prove more beneficial for their
circumstances. A Roth IRA has similar general requirements as the traditional IRA. The taxpayer
must have taxable compensation to be allowed to make a contribution, and there is no maximum
age limit for making contributions. The differences from a traditional IRA, however, are significant.
The taxpayer is never required to take a distribution or RMD. Contributions made to a Roth IRA
are nondeductible since they are made with post-tax dollars. As such, all money is tax-free when
withdrawn, provided all qualifications have been met. This presents a great advantage to those
taxpayers who may not need the retirement money and wish to pass holdings to heirs tax-free.

Copyright © 2022, The Income Tax School, Inc. – All Rights Reserved Page 8.25
 Practice Note: Under pre-SECURE Act rules, a nonspousal beneficiary of an IRA could
“stretch” the receipt of RMDs over his or her remaining actuarial life expectancy with payouts
starting in the year immediately after the decedent’s death. This estate planning strategy
allowed one to extend IRA distributions over future generations while the IRA continued to
grow tax-free. In this scenario, the younger the beneficiary, the better, as the RMD would
be smaller and the account could grow tax-free for a longer period of time. Younger
beneficiaries have longer actuarial life expectancies, resulting in smaller RMDs taken in the
beginning, growing larger over time. The “stretch IRA” strategy minimized the amount that
must be withdrawn from the IRA each year and avoided a large, taxable, lump-sum
distribution to the beneficiary.

The SECURE Act essentially eliminates the “stretch IRA” strategy. The SECURE Act
stipulates that upon death of a retirement plan account holder, all distributions must be made
within 10 years of death, provided the account holder died after December 31, 2019.
Individuals inheriting an IRA after December 31, 2019, are generally required to withdraw
all IRA plan assets within 10 years of the original account holder’s death, with limited
exceptions. There are no required distributions during the 10-year period, provided the
entire IRA balance is withdrawn within 10 years of the date of death. The SECURE Act
does not apply to account holders who die prior to December 31, 2019, and in this scenario,
a beneficiary may still “stretch” distributions over his or her own lifetime.

A key factor to consider when deciding between Roth IRAs and traditional IRAs is whether the
taxpayer expects to be in a lower or higher tax bracket in retirement. If a taxpayer expects to be in
a lower tax bracket in retirement, he or she may consider making contributions to a traditional IRA.
The taxpayer would receive the beneficial tax deduction at his or her current higher tax rate while
withdrawing the funds in retirement when he or she is in a lower tax bracket. On the other hand, if
the taxpayer expects to be in a higher tax bracket in retirement, he or she may consider making
contributions to a Roth IRA. The taxpayer would pay taxes at his or her current, lower tax rate and
withdraw the money tax-free in retirement when he or she is in a higher tax bracket.

Qualified Distributions (Roth IRA)

Distributions received by the taxpayer from a Roth IRA will not be taxable if the distributions are
"qualified distributions" or are a return of the taxpayer's regular contributions. As a result, these
nontaxable distributions are never included in the taxpayer's gross income. Distributions rolled
over from one Roth IRA to another also will not be included in one's gross income. It is, however,
possible that a part of other distributions may need to be included in the taxpayer's income.

A qualified distribution is any payment or distribution from a Roth IRA that meets the following
requirements:
1. It is made after the 5-year period beginning with the first tax year for which a contribution
was made to a Roth IRA set up for the taxpayer's benefit, and
2. The payment or distribution is:
a. Made on or after the date they reach age 59½,
b. Made because the taxpayer is disabled,
c. Made to a beneficiary or to the taxpayer's estate after their death, or
d. To pay up to $10,000 of certain qualified first-time homebuyer amounts.* 18

*Note: There is a lifetime limit of up to $10,000 in acquisition costs for a principal residence
of a "first-time homebuyer." For purposes of this definition, a "first-time homebuyer" is the
taxpayer, their spouse, any child, grandchild, or descendant of the taxpayer or spouse who
has not owned a home within two years.

18
2021 Publication 17, page 90

Copyright © 2022, The Income Tax School, Inc. – All Rights Reserved Page 8.26
If a non-qualified Roth IRA distribution is taken, it is subject to the 10% early withdrawal penalty,
similar to traditional IRA distributions.

Roth Qualifications
The qualifications for contributing to a Roth IRA are simple. The taxpayer must have taxable
compensation, and their modified AGI must be less than $208,000 for Married Filing Jointly or
Qualifying Widow(er), $140,000 for Single or Head of Household, and $10,000 for Married Filing
Separately if the taxpayer lived with their spouse at any time during the year.

"Taxable compensation" includes wages, salaries, tips, professional fees, bonuses, and other
amounts received for providing personal services. It also includes commissions, self-employment
income, nontaxable combat pay, military differential pay, and taxable alimony and separate
maintenance payments. 19

Contribution Limits
As with the traditional IRA, the Roth IRA has the following contribution limits. It is the lesser of:
• $6,000 ($7,000 if age 50 or older) for 2021; or
• The taxpayer's taxable compensation.

If the taxpayer chooses to contribute to a traditional and Roth IRA, the total of all IRA contributions
cannot exceed the contribution limits. Excess contributions could result in a penalty.

Modified AGI
Modified AGI for purposes of the Roth IRA is the taxpayer's AGI as listed on Form 1040 or 1040-
SR, line 11 with the following modifications:
1. Subtract the following:
a) Roth IRA conversions included on Form 1040 or 1040-SR, line 4b (Conversions
are discussed later in this chapter.)
b) Roth IRA rollovers from qualified retirement plans included on Form 1040 or 1040-
SR, line 5b
2. Add the following deductions and exclusions:
a) Traditional IRA deduction
b) Student loan interest deduction
c) Foreign earned income exclusion
d) Foreign housing exclusion or deduction
e) Exclusion of qualified bond interest shown on Form 8815
f) Exclusion of employer-paid adoption expenses shown on Form 8839

19
2021 Publication 17, page 87

Copyright © 2022, The Income Tax School, Inc. – All Rights Reserved Page 8.27
 Modified Adjusted Gross Income for Roth IRA Purposes

this worksheet to figure your modified AG/ for Roth IRA purposes.
1. Enter your AGI from Form 1040 or 1040-SR, line 11 . ..... . . . . . . .. . . . . . . .. . . . .. . .. .
1. - - - - - - - - - -
2. Enter any income resulting from the conversion of an IRA \other than a Roth IRA) to a Roth
IRA (included on Form 1040 or 1040-SR, line 4b) and a ro lover from a qualified retirement
plan to a Roth IRA (included on Form 1040 or 104o-SR, line 5b) .. .. . . .... . 2. - - - - - - - - - -
3. Subtract line 2 from line 1
3. - - - - - - - - - -
4. Enter any traditional IRA deduction from Schedule 1 (Form 1040), line 20
4. - - - - - - - - - -
5. Enter any student loan interest deduction from Schedule 1 (Form 1040), line 21
5. - - - - - - - - - -
6. Enter any foreign earned income and/or housing exclusion from Form 2555, line 45
6. - - - - - - - - - -
7. Enter any foreign housing deduction from Form 2555 , line 50 .. . .. ... .. . 7. - - - - - - - - - -
8. Enter any excludable savings bond interest from Form 8815, line 14 ..... . .. .
8. - - - - - - - - - -
9. Enter any excluded employer-provided adoption benefits from Form 8839, line 28
9. - - - - - - - - - -
10. Add the amounts on lines 3 through 9
10. - - - - - - - - -
11. Enter:
• $208,000 if married filing jointly or qualifying widow(er),
• $10,000 if married filin!) separately and you lived with your
spouse al any time du nng the year, or
• $140,000 for all others . . . . ..... . . .. .. . ........ . . .. ...• . .•. . .. . .. . ......
11 . - - - - - - - - - -
Is the amount on line 10 more than the amount on line 11?
If yes, then see the Note below.
If no, then the amount on line 10 is your modif ied AGI for Roth IRA purposes.
Note. If the amount on line 10 is more than the amount on line 11 and you have other income or loss items , such as social
security income or passive actMty losses, that are subject to AG I-based phaseouts, you can refigure your AG I solely for the
purpose of figuring your modified AGI for Roth IRA purposes. (If you receive social security benetits, use Worksheet 1 in
Appendix B of Pub. 590-A to refigure your AG I.) Then, go to line 3 above in this Worksheet 9-2 to refigure your modified AGI. If
you dont have other income or loss items subject to A GI-based phaseouts, your modified AG I for Roth IRA purposes is the
amount on line 10.
20

Phaseouts
The amount a taxpayer may contribute to a Roth IRA is also determined by one's modified AGI.
Phaseouts begin when one's MAGI is $198,000 in 2021 for Married Filing Jointly and Qualifying
Widow(er); $125,000 for Single, Head of Household, and Married Filing Separately (did not live
with a spouse at any time during the year); and more than $0 for Married Filing Separately (lived
with spouse at any time during the year). See the table below for the effect of modified AGI on
Roth IRA contribution limits for 2021.

20
2021 Publication 17, page 88

Copyright © 2022, The Income Tax School, Inc. – All Rights Reserved Page 8.28
 Table 9-3. Effect of Modified AGI on Roth IRA Contribution
This tab!e shows whelhllf your contribution to a Roth IRA is affected by the amount of your modified AG/_

IF you have taxable compensation and AND your modified

your Wing status Is... AGl ls... THEN •••

Marri ed llllng jointly o r less than $198,000 you can contri:bute up to $6,000 (S7,000 If you are 50 or
Ouallfylng wldow(er) older in 2021 ) .

at least S198.000 the amount you can conlrlbute Is reduced as explained

but less lllan $208,000 under Contribution limit reduced ln ctiapter 2 ol Pub_
590-A .
$208,000 or more you can't contnbute to a Roth lRA.

Marri ed IIUng separatoly and you lived zero (-0-) you can contri:bute up to $6,000 (57,000 If you are 50 or
with your spouse at any time durlng t oo year older in 2021 ) .

more than zero (·0-) the amount you can con1rlbute Is reduced as expla ned
but less lllan $10.000 under Cortlribut:/on 1/mlt reduced ln ctiapter 2 ol Pub_
590-A .

$10,000 or more you can't contri:bute to a Roth IRA .

Slngle, Head or household, or Married less than $125,000 you can contri:bute up to $6,000 (S7,000 If you are 50 or
llllng separately and you dldn1 live with older in 2021 ) .
your spouse al any time during the year
at least S125.000 the amount you can conlrlbute Is reduced as explained
but less lllan $1 40,000 under Cortlr/but:/on 1/mlt reduced ln ctlapter 2 ol Pub_
590-A .
$1 40,000 or more you can't contri:bute to a Roth IRA.
21

Contribution Reduction
Taxpayers may use the worksheet on the next page to calculate the reduced Roth IRA contribution
limit.

Practice Note: Practitioners should be aware of the “Backdoor Roth IRA.” As noted above,
taxpayers with modified AGI above certain limits are unable to contribute to a Roth IRA. A
backdoor Roth IRA allows an individual to circumvent the modified AGI limits by converting
his or her traditional IRA to a Roth IRA. Such individual transfers the entire traditional IRA
balance and owes taxes on the transferred amount, but ultimately is allowed to convert the
funds into a Roth IRA, thus avoiding the income limitations.

21
2021 Publication 17, page 89

Copyright © 2022, The Income Tax School, Inc. – All Rights Reserved Page 8.29
 Determining the Reduced Roth IRA Contribution Limit
1. Enter your modified AG I for Roth IRA purposes (Worksheet 2-1 ,
line10) ...... . .... . ......... . .... . .......... . .. . ............... . ....... . . 1. _ _ _ _ _ __
2. Enter:
• $198,000 if filing a joint return or qualifying widow(er) ,
• $-0- if married fi ling a separate return and you lived with your spouse
at any time in 2021 , or
• $ 125 ,000 for all others .. .. .. . . .. . . .. . .. .. .. . .. . .. . .. .. . .. . .. .. .. .. .. .. 2. _ _ _ _ _ __
3. Subtract line 2 from line 1 . .. .. .. . .. . . .. .. .. .. .. .. .. . . .. . .. .. .. .. . .. . .. .. . 3.
-------
4. Enter:
• $10,000 if filing a joint return or qualifying widow(er) or married filing a
separate return and you lived with your spouse at any time during the
year, or
• $ 15,000 for all others . .. .. . .. . .. .. .. . . .. . .. .. .. . .. .. .. .. . .. . .. .. .. . .. 4. _ _ _ _ _ __
5. Divide line 3 by line 4 and enter the result as a decimal (rounded to at
least three places). If the result is 1.000 or more, enter 1.000 . . . . . . . . . . . . 5. _ _ _ _ _ __
6. Enter the lesser of:
• $6,000 ($7,000 if you are age 50 or older), or
• Yourtaxable compensation . . . . .. .. . . . . . . .. . . . . . . . . . . . . . . . .. . . . . . . . . . 6. _ _ _ _ _ __
7. Multiply line 5 by line 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.
-------
8. Subtract line 7 from line 6. Round the result up to the nearest $10. If the
result is less than $200 , enter $200 . . .. .. .. .. .. . . .. . . . . . .. . . .. .. . .. . . .. . . 8. _ _ _ _ _ __
9. Enter contributions forthe year to other IRAs . .. . .. .. .. .. .. . .. .. . .. . .. .. . 9.
-------

10. Subtract line 9 from line 6 .. .. . .. . . .. . .. . . .. .. .. .. .. .. .. . . . .. .. .. .. . . .. . . . 10.

-------
11. Enter the lesser of line 8 or line 10. This is your red uced Roth IRA
contribution li mit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 . _ _ _ _ _ __
22

When an IRA Contribution Can Be Made

The taxpayer can make an IRA contribution at any time during the year or until the due date of the
return (not including extensions). The taxpayer does not have to physically make the IRA
contribution prior to filing the tax return. The taxpayer may file the return before actually making
an IRA contribution and then use the tax refund to fund an IRA contribution. Caution: The taxpayer
should complete the IRA contribution transaction by the tax filing deadline.

Remind the taxpayer that he or she can only contribute a total of $6,000 ($7,000 if age 50 or older),
or the maximum reduced contribution limit to the IRA (both traditional and/or Roth). In addition, the
taxpayer should be reminded to specifically indicate to the account custodian any contributions
made between January 1, 2022, and April 18, 2022, made for the 2021 tax year. If not specifically
designated, the account custodian would normally assume that the contribution is for 2022.

22
2021 Publication 590-A, page 42

Copyright © 2022, The Income Tax School, Inc. – All Rights Reserved Page 8.30
Conversions
A taxpayer with a traditional IRA can convert it to a Roth IRA. Such a "conversion" will be treated
as a rollover for tax purposes. Taxpayers who are required to take required minimum distributions
(RMDs) from their traditional IRA may still convert to a Roth IRA but must remember that the
amount that is to be distributed as an RMD cannot be rolled over to the Roth IRA. All the other
funds remaining in the traditional IRA are eligible for rollover. Taxpayers who are considering a
conversion from a traditional IRA to a Roth IRA should be aware of the differences since both have
specific advantages. Some significant points to consider are:
• Contributions to a traditional IRA may be deductible in the year of the contribution, but a
contribution to a Roth IRA will never be deductible.
• Earnings on a traditional IRA will be taxable when distributed, but earnings on a Roth, as
long as the taxpayer meets the holding period and age requirements, will not be taxable
when distributed.
• The taxpayer must begin taking a required minimum distribution (RMD), based on life
expectancy, from their traditional IRA starting in the year the taxpayer turns 72.
Distributions from a Roth IRA are never required.
• Contributions to a traditional IRA generally cannot be distributed to the taxpayer before age
59½ without penalty. The taxpayer can withdraw their contributions to a Roth anytime
without penalty.

When explaining the crucial difference between a traditional IRA and a Roth IRA, tax preparers
should indicate that the tax advantage of a traditional IRA comes in the year that contributions are
made. On the other hand, the tax advantage of a Roth IRA comes in the year that distributions are
received.

The taxpayer can use any one of three methods to convert a traditional IRA to a Roth IRA. The
following is a summary of the three methods of conversion:
1. Rollover. The taxpayer can withdraw all or part of his or her funds from a traditional IRA
and roll it over (contribute it) to a Roth IRA within 60 days after the distribution. The amount
that the taxpayer withdraws and converts to the Roth IRA is called a conversion
contribution. If the funds are properly rolled over, the 10% early withdrawal penalty
generally will not apply, but the taxpayer is responsible to include all or part of the
conversion contribution in his or her gross income. The taxpayer does not include in his
or her income any return of basis.
2. Trustee-to-trustee transfer. The taxpayer can direct the trustee of the traditional IRA to
transfer an amount from the traditional IRA to the trustee of the Roth IRA.
3. Same trustee transfer. If the trustee of the traditional IRA also maintains the Roth IRA,
the taxpayer can direct the trustee to transfer an amount from the traditional IRA to the
Roth IRA. 23

If the taxpayer is making the conversion with the same trustee, then the traditional IRA can simply
be re-designated as a Roth IRA. A new account, with a new contract, would not be necessary. A
conversion from a traditional, SEP, or SIMPLE IRA to a Roth IRA must be reported on Form 8606,
Nondeductible IRAs.

23
2021 Publication 17, page 89

Copyright © 2022, The Income Tax School, Inc. – All Rights Reserved Page 8.31
 Practice Note: Clients may ask practitioners about recharacterizations. A
recharacterization occurs when a contribution made to one type of IRA is treated as having
been made to a different type of IRA. In this scenario, the contribution is typically transferred
from the original IRA (where the contribution was made) to a second IRA in a trustee-to-
trustee transfer. If such transfer was made by the due date of the taxpayer’s tax return
(including extensions), he or she may treat the contribution as having been originally made
to the second IRA instead of the original IRA. Certain conditions must be met in order to
recharacterize a contribution.

It is important to note that there are no recharacterizations of conversions made in 2018.

A conversion of a traditional IRA to a Roth IRA, or a rollover from any eligible retirement
plan to a Roth IRA, made in tax years beginning after December 31, 2017, may not be
recharacterized as having been made to a traditional IRA.

Rollovers From Other Retirement Plans

Taxpayers can rollover eligible amounts from the following plans into a Roth IRA:
• Employer's qualified pension, profit-sharing, or stock bonus plan (including a 401(k) plan);
• Annuity plan;
• Tax-sheltered annuity plan (section 403(b) plan);
• Governmental deferred compensation plan (section 457 plan); 24 or
• IRA (a traditional or another Roth).

The same rules for converting a traditional IRA to a Roth IRA apply to any amount rolled over into
a Roth IRA from one of these types of plans. It should also be noted that there may be additional
rollover requirements that apply to the specific type of retirement plan. These requirements must
also be met.

Any distributions that the taxpayer would have had to include in gross income if those amounts
would not have been converted into a Roth IRA must be included in gross income in the year of
the conversion. Conversions from traditional, SEP, or SIMPLE IRAs must be reported by the
taxpayer on Form 8606, Part II.

Review Question 5
Jack, a self-employed taxpayer, wants to set up a tax-favored retirement plan for himself and his
two employees. He is checking into SEP, SIMPLE, and Qualified Plans. Which of the following
statements is correct?

a) Qualified plans are less complex than SEP or SIMPLE plans.

b) Jack would deduct any contributions for himself and his employees as an adjustment on
Schedule 1 (Form 1040).
c) Jack would deduct any contributions for himself, but not his employees, as an adjustment
on Schedule 1 (Form 1040).
d) A SEP is a salary reduction agreement between Jack and his employees where Jack, the
employer, would contribute the salary reductions to a SIMPLE IRA on each employee's
behalf.

24
2021 Publication 17, page 89

Copyright © 2022, The Income Tax School, Inc. – All Rights Reserved Page 8.32
 Review Question 6
Dick and Jane file a joint return. Dick is 51 years old, and Jane is 49. Dick is covered by a
retirement plan at work and receives a $91,000 salary, while Jane does not have a job. Their
modified AGI is $91,000. What maximum deductible amount may each of them contribute to a
traditional IRA?

a) Dick cannot contribute since he is covered by a retirement plan at work. Jane can contribute
up to $7,000.
b) They can contribute up to $6,000 each.
c) Dick can contribute up to $7,000, while Jane can contribute up to $6,000.
d) Dick can contribute up to $7,000, while Jane cannot make a deductible contribution since
she has no earned income.

Review Question 7
Joan, single and age 40, wants to open an IRA to save taxes and accumulate money for her
retirement. She had $105,000 in modified adjusted gross income (MAGI) for 2021 and wants to
make the maximum contribution for 2021. She is not covered by a retirement plan at work. Joan
wants her distributions after retirement to be tax-free. What should she do?

a) She should open a traditional IRA with a $6,000 contribution by April 18, 2022.
b) She should open a Roth IRA with a $7,000 contribution by April 18, 2022.
c) She should open a traditional IRA with a $7,000 contribution by April 18, 2022.
d) She should open a Roth IRA with a $6,000 contribution by April 18, 2022.

Review Question 8
Gus has a traditional IRA. He wants to convert it to a Roth IRA because he wants all distributions
after retirement to be tax-free. He has heard the following statements about the conversion
process. Which one is correct?

a) If he makes the conversion before April 18, 2022, the amount converted will be taxable on
his 2021 taxes.
b) The conversion must be reported on Form 5329, Part II. The entire traditional IRA must be
converted at once.
c) Partial amounts cannot be converted. The entire traditional IRA must be converted at once.
d) Gus can receive a distribution from his traditional IRA and roll it over into a Roth IRA as long
as he does it within 60 days of the distribution.

Objective #4: Adjustments Related to Education Expenses

Student Loan Interest Deduction

Taxpayers who have education loans can deduct up to $2,500 of education loan interest paid in
2021. The deduction is taken as an adjustment to income on Schedule 1 (Form 1040), line 21.
The deduction is allowed on qualifying loans for the benefit of the taxpayer or the taxpayer's spouse
or dependent at the time the debt was incurred. The deduction begins to phase out at incomes
(MAGI) of $70,000 ($140,000 for Married Filing Jointly); it is completely phased out at the MAGI of
$85,000 ($170,000 for Married Filing Jointly). Taxpayers who elect Married Filing Separately are
unable to deduct student loan interest.

Copyright © 2022, The Income Tax School, Inc. – All Rights Reserved Page 8.33
 20 IRA deduction . . . . . . . 20
I 21 Student loan interest deduction 21 I
22 Reserved for future use . . . 22 25

The taxpayer should remember that this deduction can be taken, up to the $2,500 limit mentioned
above, on any student loan interest, whether it is required or voluntary. Should the taxpayer's
student loan interest exceed $2,500 for the tax year, the excess cannot be carried over to any
future year.

Practice Note: If an individual paid $600 or more of interest on a qualified student loan
during the year, he or she should receive a Form 1098-E, Student Loan Interest Statement,
from the entity to which the interest was paid.

Qualified Student Loan

This is any loan taken out to pay the qualified higher education expenses for the taxpayer, a spouse,
or anyone who was a dependent when the loan was instituted. The person for whom the expenses
were paid must have been an eligible student. The loan would not be a qualified student loan if
any of the loan amount were used for a purpose other than higher education expenses. In addition,
the education loan cannot be a result of borrowing the amount under a qualified employee plan or
any contract purchased under that type of plan.

An eligible student is a person who was enrolled in a degree, certificate, or other program
(including a program of study abroad that was approved for credit by the institution where the
student was enrolled), leading to a recognized educational credential at an eligible educational
institution. That person carried at least half the normal full-time workload for the course of study
they are pursuing.

The eligible student could be:

• The taxpayer or the spouse;
• Any person who was a dependent when the student loan was instituted; or
• Any person the taxpayer could have claimed as a dependent for the year the student loan
was taken out.

However, there are three exceptions:

o The person must have filed a joint return for that year,
o The person had a gross income which was equal to or more than the exemption
amount for that year ($4,300 for 2021), or
o The taxpayer or the spouse could be claimed as a dependent on someone else's tax
return.

A loan is not considered a qualified student loan if the proceeds are used for other purposes or if
the loan was from either a related person or a person who borrowed the proceeds under a qualified
employer plan.

Qualified Higher Education Expenses

Qualified higher-education expenses include tuition, fees, room and board, and related expenses
such as books, supplies, and equipment. The expenses must be for education towards a degree
(including a graduate degree), certificate, or similar program at an eligible educational institution.

25
2021 Schedule 1 (Form 1040), page 2

Copyright © 2022, The Income Tax School, Inc. – All Rights Reserved Page 8.34
Student loan interest paid for with a tax-free distribution of earnings from a qualified tuition plan
(QTP), is not deductible as an adjustment to income. This rule is effective for tax years after 2018.

Loan Interest Deduct ion Worksheet -Schedule 1, Line 21

Before you begin: ../ Figure any write-in adjustments lo be entered on Sched ule I, line 24z (see the instructions for Schedule I,
line 242)_
../ Be sure you have read the Exception in the instructions for this line to see if you can use this worksheet
instead of Pub_970 to figure your deduct ion.
I. Enter the total interest you paid in 202 1 on qualified student loans (see the instructions for line 2 1)_ Don't
enter more than $2,500 l. _ _ _ _ __
2. Enter the amount from Form I 040 or l 040-SR, line 9 2. _ _ _ _ __
3. Enter the total of the amounts from Schedule I , lines 11 throug h 20, and 23 and
25 .......... . . . ............ . . .... ........... ..... ............. . 3. _ _ _ __
4. Subtract line 3 from line 2 _ . 4. _ _ _ _ __
S. Enter the amount shown below for your fil ing status.
• Single, head of household, or qualifying
widow( er}-$70,000 } ----- -- ---- s. -
• Married filingjointly-S 140,000
6. Is the amount on line 4 more than the amount on line S?

D o. Skip lines 6 and 7, enter -0- on line 8, and go to line 9.

D Yes. Subtract line 5 from li ne 4 6. _ _ _ _ __
7. Divide line 6 by $ 15,000 ( 30,000 if married fi ling jointly)_ Enter the result as a decimal (rounded to at
least three places). lf the result is 1.000 or more, enter 1.000 7. _ _ _ _ __

8. Multiply line I by line 7 .... . ..... . . .. ............. .. ..... . ...... . ... . . . . .. .......... . 8. _ _ _ _ __
9. tu dent loan inte rest ded uction. Subtract line 8 from line I . Enter the result here and on Schedule I,
line 21.
Don' t include this amount in figuring any other deduction on your return (such as on Schedule A, C,
E, etc.) _. 9. _ _ _ _ __
26

Tuition and Fees Deduction

Prior Tax Law: The tuition and fees deduction expired at the end of the 2017 tax year. The
adjustment has since been extended retroactively. If a taxpayer was eligible for the tuition
and fees deduction in tax year 2018 but was unable to take the adjusted because it had
expired, the taxpayer should amend their 2018 tax return. The tuition and fees deduction
was allowed for tax years 2019 and 2020.

The CAA 2021 repealed the tuition and fees deduction for tax years beginning after 2020. As a
result, the CAA 2021 increased the limitations for the Lifetime Learning Credit. For tax years
beginning in 2021, the Lifetime Learning tax credit that a taxpayer may claim is phased out ratably
for taxpayers with modified adjusted gross income between $80,000 and $90,000 ($160,000 and
$180,000 for married individuals who file a joint return).

26
2021 Form 1040 Instructions, page 94

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 Review Question 9
Education loan interest up to $2,500 can be taken as an adjustment to income on Schedule 1
(Form 1040). The loan will qualify for the interest deduction if it is used by an eligible student for
qualified higher education expenses. Which of the following would qualify as an education loan
for a student loan interest deduction?

a) The loan will qualify if it is used for either secondary or higher education.
b) The loan must be used by a student who carried at least half the normal full-time workload
for their course of study at an eligible educational institution.
c) Use of the loan proceeds at an eligible educational institution, which would include most
colleges and universities, but not vocational schools.
d) The loan can only be used for tuition and fees.

Review Question 10
Which of the following is not a requirement for an eligible student for purposes of the student
loan interest deduction?

a) The student must be enrolled in a degree, certificate, or other program leading to a

recognized educational credential at an eligible educational institution.
b) The student must carry at least half of the normal full-time workload for the course of study
they are pursuing.
c) The student must be in a degree, certificate, or other program in the United States.
d) The student generally needs to be the taxpayer, spouse, a person who was a dependent
when the student loan was instituted, or a person who the taxpayer could have claimed as
a dependent for the year the student loan was taken out.

Objective #5: Adjustments Related to Individual Taxpayers

Health Savings Account Deduction

A taxpayer who is an eligible individual may set up a health savings account (HSA) to pay or
reimburse for certain medical expenses incurred by the taxpayer. This type of account will be set
up with a qualified HSA trustee as a custodial account or tax-exempt trust. The taxpayer must be
able to show that any distribution from their HSA has been used for appropriate medical expenses
for the distribution to be exempt from taxes.

It should be noted that a qualified health savings account (HSA) trustee may be different from the
taxpayer's health insurance provider. The trustee could be a bank or insurance company. The
taxpayer will deal with the HSA trustee on all matters concerning that account. It could also be
anyone already approved by the IRS as a trustee for Individual Retirement Accounts (IRAs) or
Archer Medical Savings Accounts (MSAs). Special approval from the IRS is not necessary for the
taxpayer to set up the HSA. In many cases, the taxpayer's employer may be able to provide
information on HSA trustees in the employer's area.

12 Certain business expenses of reserv ists, performi ng artist s, and fee- basis government
officials. Attach Form 2106 . . . . . . . . . . . 12
I 13 Health savinas account deduction. Attach Form 8889 . . . . . . . . 13 I
14 Moving expenses for members of th e Armed Forces. Attach Form 3903 . 14 27

27
2021 Schedule 1 (Form 1040), page 2

Copyright © 2022, The Income Tax School, Inc. – All Rights Reserved Page 8.36
The Benefits of an HSA
A health savings account (HSA) can offer numerous benefits to the taxpayer. A major benefit is
that any earnings on assets in the account (interest or other earnings) will accumulate tax free. In
addition, the taxpayer can claim a tax deduction for contributions to the account if the contributions
are made by anyone other than their employer. The employer's contributions are already tax-free
since they are not included in gross income on the taxpayer's W-2. Then, when the taxpayer takes
a distribution from their HSA account, it will be totally tax-free if it is used entirely for qualified
medical expenses. In addition, the assets in the HSA may be carried over if they are not all used
in the current year and will stay with the taxpayer even if he or she is no longer an employee or
changes employers. In other words, the taxpayer does not have to “use it or lose it.” The taxpayer
owns the account. Thus, the account moves with the taxpayer even if he or she changes
employers.

HSAs are often referred to as having a triple tax advantage: 1) contributions are tax-deductible,
even if the taxpayer does not itemize, 2) the HSA balance accumulates tax-free, and 3) withdrawals
for qualified medical expenses are tax-free.

Practice Note: The CARES Act expanded coverage for HSAs to allow for tax-free
reimbursement of feminine hygiene products. Additionally, the Affordable Care Act, signed
into law over 10 years ago on March 23, 2010, repealed the ability for individuals to use
HSA accounts to purchase OTC drugs. In addition to expanding coverage for tax-free
reimbursement of feminine hygiene products, the CARES Act eliminates the provision in the
Affordable Care Act that limited the use of HSAs to only prescribed medicines or drugs. In
other words, individuals will be able to use their HSAs, HRAs, health FSAs, and Archer
MSAs to purchase over-the-counter medicine. This provision is effective for expenses
incurred after December 31, 2019.

Eligibility Requirements for an HSA

Eligibility for an HSA depends upon coverage by a high deductible health plan (HDHP) on the first
day of the month. The taxpayer cannot be enrolled in Medicare or be claimed as a dependent on
another's return. The taxpayer cannot be covered by other health coverage that is not an HDHP.
If another individual is entitled to claim the taxpayer as a dependent, the taxpayer cannot claim a
deduction for an HSA contribution. This is true even if the other person does not actually claim the
taxpayer as a dependent on their or her return.

Each eligible spouse must have a separate HSA. The taxpayer and the spouse are not permitted
to have a joint HSA.

Reporting Contributions on the Taxpayer's Return

Employer's contributions to the taxpayer's HSA, even if the contributions are made by the employer
using the amount of an employee's salary reduction through a cafeteria plan, will not be included
in the taxpayer's income. If the taxpayer makes a contribution or anyone other than the taxpayer's
employer contributes on the taxpayer's behalf, then the taxpayer can claim those non-employer
contributions as an adjustment to income.

If the taxpayer is a partner and the partnership makes contributions to that partner's HSA, these
amounts are not considered to be a contribution by an employer. It is treated either as a distribution
of money (these are not included in the partner's gross income) or, if the partnership's HSA
contribution was for services rendered by the partner, will be treated as guaranteed payments
which are deductible by the partnership (these are includible in the partner's gross income). In
either situation, the partner can deduct the contribution made to the partner's HSA.

Copyright © 2022, The Income Tax School, Inc. – All Rights Reserved Page 8.37
Contributions by an S corporation to a 2% shareholder-employee's HSA for services are included
in the employee's W-2 and deducted by the S corporation. Since the income was taxable to the
shareholder-employee, they may deduct the contribution as an adjustment to income on their tax
return. Typically, employees cannot deduct employer contributions because they are made pre-
tax. This is not the case for the shareholder-employee.

Form 8889, Health Savings Accounts (HSAs), must be used by taxpayers to report any
contributions to their HSA. For 2021, the taxpayer must report any contributions made for 2021 (or
designated for 2021 and made up to April 18, 2022) on Form 8889 and file this form along with
Form 1040. Employer contributions and qualified distributions from the taxpayer's HSA are also
reported on the form.

The taxpayer will receive certain reporting forms that show amounts contributed to their HSA during
the year. Employer contributions will be shown on the taxpayer's W-2 in box 12 and will be coded
"W." This will cause these contributions to be excluded from the taxpayer's gross income. Certain
tax reporting forms from the trustee will also show contributions to an HSA during the year. These
will be reported to the IRS, with copies sent to the taxpayer, on Form 5498-SA, HSA, Archer MSA,
or Medicare Advantage MSA Information. Taxpayers should follow Form 8889 instructions to report
HSA contributions. The taxpayer's HSA deduction will be taken on line 13 of Schedule 1 (Form
1040).

Contribution Limits
In tax year 2021, the contribution limits for an HSA and minimum and maximum deductibles for an
HDHP are as follows:

Self-Only Coverage Family Coverage

Contribution Limit $3,600 $7,200
Minimum Annual Deductible $1,400 $2,800
Maximum Annual Deductible
and Other Out-of-pocket $7,000 $14,000
Expenses 28

Penalty on Early Withdrawal of Savings

If a taxpayer withdraws money from a saving program and incurs a penalty, the penalty is an
allowable adjustment to gross income. This penalty should be reported to the taxpayer on Form
1099-INT, where the interest income is reported. Care should be used not to confuse this
adjustment with the IRA penalty. With the IRA penalty, the IRS receives more money from the
taxpayer. With an early withdrawal penalty, the IRS receives less.

Report the total interest received on Form 1040, line 2b; do not reduce this figure by the penalty
amount. The early withdrawal penalty is imposed by the bank or other private institution. The early
withdrawal penalty is reported on line 18 of Schedule 1 (Form 1040) as an adjustment to income.

Self-emoloved health insurance deduction . 17

'1a Penalty on early withdrawal of savings 18 I
19a Alimony paid . 19a 29

28
2021 Publication 969, pages 4-5
29
2021 Schedule 1 (Form 1040), page 2

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Alimony Paid
In Chapter 3, we discussed alimony payments in detail. Remember, the TCJA made significant
changes to the treatment of alimony payments.
• Divorces executed before January 1, 2019 (“Pre-TCJA”): If a divorce was executed
prior to January 1, 2019, alimony is considered taxable to the recipient and deductible by
the payee. Alternately, the parties can stipulate in the divorce decree that no payments
will be considered alimony for tax purposes, thus electing out of the treatment.
• Divorces executed after December 31, 2018 (“Post-TCJA”): If a divorce was executed
after December 31, 2018, alimony is no longer included in the income of the recipient and
is no longer deductible by the payee.
• Modifications of agreements after December 31, 2018: If a divorce or separation
agreement was executed prior to January 1, 2019, but modified after December 31, 2018,
the new TCJA rules apply only to the extent that the modification adds language specifically
stating that the modified agreement is subject to the new law.

It is imperative for preparers to determine when a client’s divorce agreement was executed.

For divorce or separation agreements executed after December 31, 2018 (or if the taxpayer entered
into the divorce or separation agreement on or before December 31, 2018, and the agreement was
changed after December 31, 2018), the payer spouse may no longer deduct the alimony paid
during the tax year, nor the recipient spouse report it as income on the tax return. However, for
divorce or separation agreements executed before 2019, alimony is still deductible for the payer
spouse and reported as income for the other party.

Alimony is a payment or a series of payments to a spouse or former spouse required under a

divorce or separation instrument and must meet certain requirements. Alimony received pursuant
to a divorce executed before January 1, 2019, should be reported on Schedule 1 (Form 1040), line
2a, as income (on line 2b, the date of the original divorce or separation agreement, that relates to
the alimony payment received, reported on line 2a). Alimony paid pursuant to a divorce executed
before January 1, 2019, should be deducted on Schedule 1 (Form 1040), line 19a, as an adjustment
to income. Monthly cash payments may be considered alimony.

Since a divorced or separated spouse must report alimony payments received as income, it is
reasonable that the paying spouse can deduct the amount from gross income. The paying spouse
must report the recipient's Social Security Number on line 19b and the date (month and year) of
the original divorce or separation agreement on 19c, along with the amount paid (on line 19a). Not
all payments received from a spouse under a divorce decree or separation agreement are
considered alimony.

Payments not alimony – Alimony does not include child support, payments that are the spouse's
part of community income, payments to maintain the payer's property, use of the payer's property,
and noncash property settlements. (A description of what is considered income was covered in
Module 1, Chapter 3 – Income.)

Alimony paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19a

b Recipient's SSN . . . . . . . . . . . . . . . . . . . . ► s s s is s is s s s
c Date of original divorce or separat ion agreement (see instructions) ► __ Ju_n_e_20
_1_1 _ _ 30

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2021 Schedule 1 (Form 1040), page 2

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 Review Question 11
Jan works for Morbucks Corp. Her company will contribute up to $2,500 to a health savings
account (HSA) for her if she elects to open one and meets all the requirements. All of the
following statements concerning HSAs are correct except:

a) Jan can claim a deduction for contributions made to her HSA by her employer, even if she
does not itemize.
b) Jan must be covered by a high deductible health plan (HDHP).
c) Contributions made by Jan's employer to her HSA will not be included in her income.
d) No permission is required from the IRS to establish an HSA.

Objective #6: Other Less Common Adjustments

In prior years, Schedule 1 was only one page in length; however, the 2021 Schedule 1 spans two
pages. This page expansion is largely due to the fact that line 8, “Other income,” and line 24,
“Other adjustments,” are no longer reported in aggregate on a single line. Rather, line 8 was broken
out into 17 sublines of common and uncommon forms of other income, and line 24 lists 12 common
and uncommon adjustments to income. Line 24z is used to report any adjustments not reported
elsewhere, and taxpayers should list the type and amount of such adjustments.

24 Other adjustm nts:

Jury duty pay (see Ins ructio ), . . . . . . . . . . .
b Deduct bl expe ses r ted to Income r · ported on ,I n, 8 om
the rent _ of personal property engaged In for pro I. . . .
c Noni able amou t ot h.e val!Je o Otymp c d Paralympic
medals and USOC p e money ~ ported on I ne Bl . . . . .
d Refor -tatlon mort mlion: nd - nse - . . . . . . • . •
e Repaym nt of supp en · unemployment benefits under the
Trade Al:; of 197 . . . . . . . . . . . . . . . . .
f Contribution 10 tion 501 c)( 8}{0) onp
g Co tributions by cert n chapl ns to section 400(b) plans . •
h Attorney fees · rt costs or ctlo involving c
uni wful dlscr _ lnstructloos) . . . .
co ts you id n c - -
om, tlon you _provided th
ns . . . . .....
Housing deduction from Form 2555 . . . . . .
k E or tion pen from Scheel
(form, 1041) . . . . . . . . . . . .....
z Other djus m nts. L t type nd atnotm

25 24 ..... 25 31

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2021 Schedule 1 (Form 1040), page 2

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 Practice Note: The Archer MSA deduction was reported as an “other adjustment” in prior
tax years. In tax year 2021, it moves to line 23 of Schedule 1.

Reserved for future use 22 I

I 23 Archer MSA deduction . 23 I
24 Other adjustments:
I I - 32

Review Question 12
Which of the following less common adjustments to income can be made on Schedule 1 (Form
1040), line 24?

a) An adjustment for jury duty pay

b) A deduction for alimony paid
c) A deduction for any penalties on early withdrawal of savings
d) An HSA (health savings account) deduction

Reading References for Chapter 8:

• Pub 17 – “Part Two. Income and Adjustments to Income”
• Pub 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
• Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs)
• Pub 970 – “Chapter 4. Student Loan Interest Deduction”
• Form 1040 Instructions – “Instructions for Schedule 1: Adjustments to Income”
• Form 2106 Instructions
• Form 8606 Instructions
• Form 3903 Instructions

32
2021 Schedule 1 (Form 1040), page 2

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