The IRS bases your taxable income on several categories of earnings that might be part of your gross income. These categories not only include wages, but also pensions, gambling income, sweepstakes and unemployment payments. After you calculate your total gross income for the tax year, adjust your gross income. You’ll use Form 1040 and applicable IRS schedules to calculate your preliminary adjusted income.
Total Gross Income
Use the latest available 2019 Form 1040 to estimate your gross income. The 1040 form lists all the categories of income that you must include. You must also use specific tax schedules to estimate some income amounts that contribute to your gross income.
Calculate Wages and Additional Income Sources
Your gross income always includes wages and earnings from work, such as tips and commissions. The W-2 that you receive from your employer will have your gross earnings for the tax year. If you haven’t received your W-2, use your last pay stub to find your gross tax year's total wages. If you haven’t reached the end of the year, add gross income from any upcoming pay periods to the total on your pay stub,
The gross income section of Form 1040 also requires you to list taxable and nontaxable interest earned and dividends that you received. You’ll also list your annual income from IRA payments, Social Security income, pensions and annuities. Add capital gains or losses along with the totals of your other income sources that you calculated on Line 9 of Schedule 1.
Review your income entries from all lines in each category of the gross income section. Use the instructions on Line 7b on the 2019 Form 1040 to add together only those amounts required to total your gross income.
Commonly Added Schedule 1 Income
Schedule 1 income that you include in your gross income includes alimony, unemployment compensation and state or local tax refunds. Use Line 8 on this schedule for income sources that don’t fit other lines on Schedule 1. Add prizes, pay for jury duty, canceled debt and lottery winnings that you received here. For a complete list, see Form 1040 instructions.
Some added income categories require you to use additional schedules or forms to calculate them before you include them in your Schedule 1 total. As of 2019, the IRS requires that you include income from virtual currency transactions on Schedule 1. Use Form 8949 to calculate any capital gains in this category. Use Schedule C to estimate applicable business income.
Schedule E lets you total up your income from trusts, rental properties, royalties, partnerships and S corporations. Use Schedule F for farming income or losses. Form 4797 is for business income from assets that you traded or sold.
Estimate Adjustments to Gross Income
Calculate your adjustments to your gross income, using categories listed in Part II of Schedule 1. Several of the possible adjustments apply to specific filers, and some require using additional forms to calculate your adjustment.
Educator expenses, IRA contributions, alimony you paid and interest on student loans are common adjustments on Schedule 1. Self-employed filers often use the adjustment for health insurance, SEP plans and the deductible portion of self-employment tax.
Moving expenses for military personnel, health savings accounts and tuition adjustments all require you to estimate them first on a different IRS form. You won’t find charitable donations on the list of adjustments to gross income. You apply this deduction after you estimate your adjusted gross income.
Finalize AGI Estimate
Add all your adjustments from Schedule 1, Part II. Enter this amount on your Form 1040, Line 8a. Subtract Line 8a from your gross income on Line 7b. Enter the difference as your adjusted gross income on Line 8b.
The IRS requires you to attach many of the forms that you use to calculate your adjustments to your gross income. When you are ready to file taxes, you might need to recalculate your adjustments if the required form or schedule has changed since the previous tax year.
- Internal Revenue Service: 2019 Instruction 1040
- Internal Revenue Service: 2019 Form 1040
- Internal Revenue Service: Schedule 1 Additional Income And Adjustments To Income
- IRS. "Definition of Adjusted Gross Income." Accessed July 2, 2020.
- IRS. "IRS Schedule 1—Additional Income and Adjustments to Income." Accessed July 2, 2020."
- IRS. "Form 1040." Accessed July 2, 2020.
Carol Luther has published feature articles in print magazines, ghostwritten blogs, and produced digital content since 2007. She has published personal finance and small business articles for the Houston Chronicle, Mahalo, the Nest, USA Today, Wahm, and Zacks. Carol has designed, implemented and managed multi-year, multimillion-dollar domestic and international projects services for higher education, nonprofits, and small to medium businesses for more than 20 years.