Qualified Dividends and Capital Gain Tax Worksheet, Line 16

The Qualified Dividends and Capital Gain Tax Worksheet is the calculation you use to figure the amount that goes on Form 1040, Line 16, when some of your income is qualified dividends or long-term capital gains. It separates that preferential income from the rest of your taxable income, taxes it at 0%, 15%, or 20%, and taxes your wages, interest, and other ordinary income at the regular graduated rates. Without the worksheet, every dollar would be taxed at ordinary rates and you would overpay.¹

When You Use This Worksheet

Use the Qualified Dividends and Capital Gain Tax Worksheet if you reported qualified dividends on Form 1040, Line 3a, or you received capital gain distributions and were able to check the box on Line 7b without filing Schedule D.¹ This covers most investors who hold mutual funds, ETFs, or a handful of individual stocks and had no unusual transactions.

Switch to the longer Schedule D Tax Worksheet in a few specific situations: Schedule D, Line 18 or Line 19, is greater than zero and Lines 15 and 16 are both gains (which happens with 28% rate gain from collectibles or unrecaptured Section 1250 gain from depreciated real estate), or 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, skip both worksheets and use the regular Tax Table or Tax Computation Worksheet for Line 16.

What Income Qualifies for the Lower Rates

Qualified Dividends

A dividend qualifies if it comes from a U.S. corporation or a qualifying foreign corporation. Foreign corporations qualify when they are covered by a comprehensive U.S. income tax treaty with an information-exchange program, or when their stock trades on an established U.S. securities market.³ Passive foreign investment companies never qualify.

You also have to hold the stock long enough. The rule is 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, it jumps to at least 91 days within a 181-day window.⁴ Your broker reports qualified dividends in Box 1b of Form 1099-DIV, and the IRS can disallow them if you didn’t actually meet the holding period.

REIT dividends are generally not qualified and get taxed at ordinary rates, though they have historically been eligible for up to a 20% deduction under the qualified business income rules.⁵

Long-Term Capital Gains

A capital gain is long-term if you held the asset for more than one year before selling.⁶ Stocks, bonds, real estate, and digital assets all count. Hold for one year or less and the gain is short-term, taxed at ordinary rates. Short-term gains never enter this worksheet’s preferential calculation.

Capital gain distributions from mutual funds count as long-term regardless of how long you have owned fund shares.⁷ These appear in Box 2a of Form 1099-DIV and flow either to Schedule D, Line 13, or directly to Form 1040, Line 7a.

The 2026 Rate Thresholds

Qualified dividends and long-term capital gains are taxed at 0%, 15%, or 20% depending on where your total taxable income falls. The 2026 thresholds, set by Rev. Proc. 2025-32, are:⁸

0% rate: taxable income up to $49,450 (single or married filing separately), $98,900 (married filing jointly or surviving spouse), or $66,200 (head of household).
15% rate: income above those amounts up to $545,500 (single), $306,850 (married filing separately), $613,700 (married filing jointly or surviving spouse), or $579,600 (head of household).
20% rate: income above the 15% ceiling.⁶

These rates apply only to the qualified dividends and long-term gain portion of your income. Wages, interest, short-term gains, and other ordinary income still get taxed at the regular 10% through 37% rates.⁹ The worksheet exists to separate the two pools and apply the right rate to each.

Two higher rates exist for specialized gains that bypass this worksheet entirely: unrecaptured Section 1250 gain tops out at 25%, and gain from collectibles or qualified small business stock under Section 1202 tops out at 28%.⁶ If you have either, use the Schedule D Tax Worksheet.

How the Worksheet Computes Your Tax

The worksheet runs 25 lines, but the logic has four stages: separate your income into pools, allocate the preferential pool across the rate tiers, compute tax on each piece, and check that result against regular rates.¹

Stage 1: Split Ordinary Income From Preferential Income

Line 1 is your taxable income from Form 1040, Line 15. Lines 2 and 3 pull in your qualified dividends (Line 3a) and your net capital gain (the smaller of Schedule D, Lines 15 or 16, or Form 1040, Line 7a if you did not file Schedule D). Line 4 adds them for total preferential income. Line 5 subtracts Line 4 from Line 1, leaving your ordinary income portion.¹⁰ This is the key split the rest of the worksheet depends on.

Stage 2: Allocate Preferential Income Across the Rate Tiers

Line 6 enters the 0% rate ceiling for your filing status. Lines 7 through 9 figure out how much of your preferential income sits under that ceiling after your ordinary income has already used up part of the bracket. Whatever lands on Line 9 is taxed at 0%, producing no tax.

Lines 10 through 17 repeat the exercise for the 15% tier. Line 13 enters the 15% ceiling, and the worksheet calculates how much preferential income fits between the 0% and 15% ceilings. Line 17 is that amount, and Line 18 multiplies it by 0.15. Any preferential income left after Lines 9 and 17 lands on Line 20 and gets taxed at 20% on Line 21.

Stage 3: Compute Tax on the Ordinary Income

Line 22 computes the tax on the ordinary income from Line 5. If that amount is under $100,000, use the Tax Table. If it is $100,000 or more, use the Tax Computation Worksheet. This is where your wages, interest, and short-term gains get taxed at the regular graduated rates.

Stage 4: Add It Up and Compare

Line 23 adds the ordinary-income tax (Line 22) to the preferential-income taxes (Lines 18 and 21). Line 24 computes what your tax would have been if all your income had been taxed at regular rates. Line 25 takes the smaller of the two.¹ That final number goes on Form 1040, Line 16. The comparison on Line 25 guarantees the worksheet never costs you more than regular rates would.

A Worked Example

A married couple filing jointly has $150,000 of taxable income. Of that, $30,000 is qualified dividends and long-term capital gains. Their ordinary income is $120,000. Using the 2026 thresholds:

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

Their $120,000 of ordinary income already blows past the $98,900 ceiling, so none of the preferential income fits in the 0% tier. Line 9 is $0. The full $30,000 moves to the 15% tier, producing $4,500 of tax on Line 18. Line 22 computes the tax on $120,000 of ordinary income at graduated rates, and Line 23 adds the two pieces.

Change the numbers: same couple, $80,000 taxable income, $20,000 of it preferential. Ordinary income is $60,000. The 0% ceiling is $98,900, leaving $38,900 of room after ordinary income. The full $20,000 of preferential income fits inside the 0% tier and is taxed at zero. That saves roughly $3,000 compared with ordinary rates, which is where the worksheet pays off most for moderate-income investors.

What the Worksheet Doesn’t Cover

The worksheet produces your income tax at the preferential rates. A few other taxes sit on top of it.

The Net Investment Income Tax adds 3.8% on the lesser of your net investment income or the amount your modified adjusted gross income exceeds $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).¹¹ It is reported on Form 8960, not on the worksheet. The practical effect is that someone in the 20% capital gains bracket whose MAGI crosses the threshold faces a combined federal rate of 23.8%.

The Alternative Minimum Tax uses the same 0%, 15%, and 20% preferential rates, but on Form 6251 you complete a separate AMT version of the worksheet using AMT-adjusted figures.¹² If you exercised incentive stock options or claim large deductions AMT disallows, check Form 6251 before treating the worksheet result as your full federal picture.

State tax is separate. Most states tax long-term gains and dividends at ordinary rates with no preferential treatment, a handful give reduced rates, and states without a broad income tax generally don’t tax them at all. Check your state’s instructions on their own terms.

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. United States Income Tax Treaties That Meet the Requirements
4
Internal Revenue Service. IRS Gives Investors the Benefit of Pending Technical Corrections on Qualified Dividends
5
Internal Revenue Service. Qualified Business Income Deduction
6
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
7
Internal Revenue Service. Mutual Funds (Costs, Distributions, etc.) 4
8
Internal Revenue Service. Rev. Proc. 2025-32
9
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
10
Internal Revenue Service. Form 1040 (2025)
11
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
12
Internal Revenue Service. 2025 Instructions for Form 6251