Qualified Dividends and Capital Gain Tax Worksheet, Line 16

The Qualified Dividends and Capital Gain Tax Worksheet is the calculation the IRS gives you to figure the number that goes on Form 1040, Line 16, when part of your income is qualified dividends or long-term capital gains. It separates those investment amounts from the rest of your taxable income and taxes them at 0%, 15%, or 20% while everything else stays on the ordinary brackets. Without it, all your income would be taxed at ordinary rates and you would overpay.¹

When to Use This Worksheet

You use it if you reported qualified dividends on Form 1040, Line 3a, or you received capital gain distributions and checked the box on Line 7b without needing Schedule D.¹ Most investors who hold mutual funds, ETFs, or a handful of individual stocks land here.

Switch to the longer Schedule D Tax Worksheet if Schedule D, Line 18 or Line 19, is greater than zero and Lines 15 and 16 are both gains. That situation arises when you have 28% rate gain from collectibles or unrecaptured Section 1250 gain from depreciated real estate. You also use the Schedule D Tax Worksheet if you file Form 4952 for investment interest expense with an amount on Line 4g.² If you have no qualified dividends and no net capital gain at all, you skip both worksheets and use the standard Tax Table or Tax Computation Worksheet for Line 16.

What Income Gets the Preferential Rates

Two things flow into the worksheet at the lower rates: qualified dividends and long-term capital gains.

A dividend qualifies if it comes from a U.S. corporation or a qualifying foreign corporation, and if you held the stock for at least 61 days during the 121-day window that starts 60 days before the ex-dividend date. For preferred stock dividends tied to periods longer than 366 days, the requirement is at least 91 days within a 181-day window.³ Your broker reports qualified dividends in Box 1b of Form 1099-DIV. Dividends from passive foreign investment companies never qualify, and REIT dividends are generally not qualified either.

A capital gain is long-term if you held the asset more than one year before selling.⁴ Held one year or less, the gain is short-term and taxed at ordinary rates. Short-term gains never enter the worksheet’s preferential calculation. Capital gain distributions from mutual funds are always long-term regardless of how long you have owned fund shares, and they appear in Box 2a of your 1099-DIV.⁵

The 0%, 15%, and 20% Thresholds for 2026

The rate that applies to your qualified dividends and long-term gains depends on where your total taxable income falls. For 2026, set by Rev. Proc. 2025-32:⁶

0% rate: taxable income up to $49,450 single or married filing separately, $98,900 married filing jointly or surviving spouse, $66,200 head of household.
15% rate: above those thresholds up to $545,500 single, $306,850 married filing separately, $613,700 married filing jointly or surviving spouse, $579,600 head of household.
20% rate: taxable income above the 15% ceiling.⁴

These rates apply only to your qualified dividends and long-term capital gains. Wages, interest, short-term gains, and other ordinary income are still taxed at the graduated rates of 10% through 37%.⁷ The worksheet’s whole job is to keep those two pools separate.

How the Worksheet Runs the Numbers

The worksheet has 25 lines, but the work breaks into four stages.¹

Separate Ordinary From Preferential Income

Line 1 is your total taxable income from Form 1040, Line 15. Lines 2 and 3 bring in your qualified dividends (Line 3a) and net capital gain (the smaller of Schedule D, Line 15 or 16, or Form 1040, Line 7a if you did not file Schedule D). Line 4 adds them together. Line 5 subtracts Line 4 from Line 1, leaving the ordinary income portion. That split is the whole point of the worksheet.⁸

Fit Preferential Income Into Each Rate Tier

Line 6 enters the 0% ceiling for your filing status. Lines 7 through 9 work out how much of your preferential income fits under that ceiling after your ordinary income has already used up bracket space below it. Whatever fits on Line 9 is taxed at 0% and generates no tax at all.

Lines 10 through 17 do the same thing for the 15% tier. Line 13 holds the 15% ceiling, and the worksheet measures the room between the 0% and 15% ceilings. Line 17 is the amount taxed at 15%, and Line 18 multiplies it by 0.15. Anything left over sits on Line 20 and gets taxed at 20% on Line 21.

Compute Tax on Ordinary Income

Line 22 computes the tax on the ordinary income from Line 5 using the regular graduated rates. Under $100,000, you use the Tax Table. At $100,000 or more, you use the Tax Computation Worksheet.

Add and Compare

Line 23 adds ordinary tax (Line 22) to the two preferential taxes (Lines 18 and 21). Line 24 computes what your tax would have been on the whole taxable income at ordinary rates. Line 25 takes the smaller of the two, and that is the number for Form 1040, Line 16. The comparison guarantees you never pay more with this worksheet than under regular rates alone.

A Worked Example

Take a married couple filing jointly with $150,000 in taxable income, $30,000 of which is qualified dividends and long-term capital gains. Ordinary income is $120,000.

Line 1: $150,000
Line 4: $30,000
Line 5: $120,000
Line 6: $98,900 (0% ceiling for married filing jointly in 2026)

Their $120,000 of ordinary income already exceeds the $98,900 ceiling, so nothing fits in the 0% tier and Line 9 is $0. All $30,000 of preferential income moves to the 15% tier, producing $4,500 of tax on Line 18. The tax on the $120,000 of ordinary income is figured separately on Line 22, and the two amounts add together on Line 23.

Change the facts: same couple, $80,000 taxable income, $20,000 of it preferential, so $60,000 ordinary. After $60,000 of ordinary income, $38,900 of room remains under the 0% ceiling. All $20,000 of preferential income fits, and every dollar of it is taxed at 0%. That saves roughly $3,000 compared with ordinary rates. This is where the worksheet pays off most visibly for moderate-income investors.

What the Worksheet Doesn’t Include

Line 16 is federal income tax, and the worksheet stops there. A few things sit outside it that can still change what you owe.

The Net Investment Income Tax adds 3.8% on top of the rates above if your modified adjusted gross income exceeds $200,000 single, $250,000 married filing jointly, or $125,000 married filing separately. You owe it on the lesser of your net investment income or the amount your MAGI exceeds the threshold, and you report it on Form 8960.⁹ For a high-earning investor in the 20% capital gains bracket, the combined federal rate is effectively 23.8%. These thresholds are not adjusted for inflation.

The Alternative Minimum Tax uses the same 0%, 15%, and 20% preferential rates, but if you owe AMT you complete a separate AMT version of the worksheet on Form 6251 using AMT-adjusted figures.¹⁰ If you exercised incentive stock options or have large state tax deductions, check Form 6251 before assuming Line 16 is the end of the story.

State income tax is separate. Most states tax long-term capital gains and dividends at ordinary income rates with no preferential treatment, and state rates on investment income range from 0% to over 14%. Look up your state’s return instructions on their own.

1
Internal Revenue Service. Instructions 1040 (2025) – Qualified Dividends and Capital Gain Tax Worksheet
2
Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040)
3
Internal Revenue Service. IRS Gives Investors the Benefit of Pending Technical Corrections on Qualified Dividends
4
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
5
Internal Revenue Service. Mutual Funds (Costs, Distributions, etc.) 4
6
Internal Revenue Service. Rev. Proc. 2025-32
7
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
8
Internal Revenue Service. Form 1040 (2025)
9
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
10
Internal Revenue Service. 2025 Instructions for Form 6251