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Unit 3: Adjustments & Deductions

Master above-the-line adjustments on Schedule 1 and Schedule A itemized deductions, turning total income into taxable income for the 2026 tax year.

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Shmuel Eagle

Shmuel Eagle

Instructor

Unit 3: Adjustments & Deductions

What Will You Learn

  • Complete Schedule 1 Part II above-the-line adjustments from top to bottom
  • Calculate 2026 HSA contribution limits ($4,400 / $8,750 / $1,000 catch-up)
  • Report outside HSA contributions and reconcile W-2 Box 12 Code W amounts
  • Apply pre-2019 alimony deduction rules and report recipient SSN on Line 19b
  • Explain how lowering AGI protects tax credits, medical floors, and subsidies
  • Compare Schedule A itemized totals against 2026 standard deduction amounts
  • Apply the OBBBA $40,400 SALT cap and calculate the $505,000 MAGI phase-out
  • Deduct mortgage interest on up to $750k acquisition debt and restored Box 5 PMI
  • Calculate the 2026 0.5% AGI floor and secure $250+ acknowledgment letters
  • Claim up to $1,000 Single / $2,000 MFJ in above-the-line charitable cash gifts

About This Class

Course & Unit Overview: Adjustments & Deductions (Classes 11–13)

Welcome to Unit 3 of BlueLink Academy’s 1040 Income Tax Preparation Course. This unit focuses on the critical calculation layer that converts total income into Adjusted Gross Income (AGI) and taxable income: Schedule 1 Above-the-Line Adjustments, the Standard Deduction versus Itemized Schedule A Deductions, and the Qualified Business Income (QBI) deduction.

The Preparer's Mindset

Adjustments and deductions are where proactive tax preparers deliver substantial legal tax savings for clients. Every dollar of above-the-line adjustment directly lowers AGI—unlocking valuable phase-outs, credits, and healthcare subsidies across the entire return.

Unit Curriculum Architecture

Class 11

Schedule 1 Adjustments to Income

Educator expenses, HSA Form 8889, self-employed retirement, student loan interest, and penalty on early withdrawal.

Class 12

Standard vs. Itemized Deductions

2026 standard deduction rates, age 65+ senior bonus, Schedule A medical floor, SALT limits, mortgage interest, and charity.

Class 13

Qualified Business Income (QBI)

Section 199A 20% pass-through deduction mechanics, taxable income phase-in thresholds, and SSTB limitations.

Unit Quick Reference Table

Adjustment / Deduction Item Tax Form / Schedule 2026 Statutory Standard
Educator Expenses Schedule 1 Line 11 $300 per qualifying educator ($600 if both MFJ teach)
HSA Contribution Deduction Form 8889 / Sched 1 $4,300 Self-only · $8,550 Family (+ $1,000 age 55+ catch-up)
Student Loan Interest Schedule 1 Line 21 Up to $2,500 maximum above-the-line deduction
Standard Deduction (2026) Form 1040 Line 12 $16,100 Single · $24,150 Head of Household · $32,200 MFJ
Medical Expense Deduction Schedule A Line 4 Unreimbursed expenses exceeding 7.5% of AGI
Section 199A QBI Deduction Form 8995 / 8995-A Up to 20% of Qualified Business Income from pass-throughs
Requirements
  • Completion of Unit 1 (Filing Status) and Unit 2 (Income Essentials)
  • Basic understanding of Form 1040 layout and AGI concepts
  • Access to a standard calculator or tax preparation software
  • Reference to 2026 inflation adjustments and IRS deduction tables
  • No prior CPA license or accounting credential required

Frequently Asked Questions

Why is an above-the-line adjustment more powerful than an itemized deduction?
An itemized deduction only helps if total deductions exceed the standard deduction. Above-the-line adjustments help everyone, reducing AGI and protecting credits.
If an employer contributes to an employee's HSA through payroll, is it deductible on Schedule 1?
No. Payroll contributions are reported in Box 12 with Code W and already excluded from taxable wages. Deducting them again is a double deduction.
When is alimony paid deductible by the payer?
Only for divorce agreements executed on or before December 31, 2018. The recipient's SSN must be reported on Line 19b. Post-2018 agreements are non-deductible.
What is the 2026 SALT deduction cap under the One Big Beautiful Bill Act (OBBBA)?
The cap is $40,400 ($20,200 MFS) for 2026 through 2029, phasing out at $505,000 MAGI, before reverting to $10,000 in 2030.
Is interest on a Home Equity Line of Credit (HELOC) deductible?
Only if the proceeds were used to buy, build, or substantially improve the securing residence. Personal use makes it 100% non-deductible.
Can private mortgage insurance (PMI) be deducted for 2026 returns?
Yes. The OBBBA restored and made permanent the PMI deduction starting in 2026, reported in Box 5 of Form 1098.
How does the 2026 0.5% AGI floor on cash charitable donations work?
Cash donations on Schedule A are only deductible to the extent they exceed 0.5% of AGI. Non-cash donations are not subject to this floor.
Can non-itemizers deduct charitable contributions in 2026?
Yes. Taxpayers claiming the standard deduction can deduct up to $1,000 Single / $2,000 MFJ in cash donations on Schedule 1 Line 24b.
When is Form 8283 required for non-cash donations?
When total non-cash charitable deductions exceed $500. Section B requires a qualified appraisal for items exceeding $5,000.
If a married couple files separately (MFS) and one spouse itemizes, can the other take the standard deduction?
No. Under the MFS consistency rule, if one spouse itemizes, the other spouse must also itemize and their standard deduction is $0.

Meet Your Instructors

Shmuel Eagle

Shmuel Eagle

Lead Tax Instructor

Co-founder of BlueLink with 15+ years in tax preparation and office management.

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