What this line means
A yes-or-no decision point. If lines 18 and 19 are both blank or zero, you use the Qualified Dividends and Capital Gain Tax Worksheet (in the Form 1040 instructions) to calculate your tax instead of the tax tables. This worksheet applies the lower long-term capital gains rates to your qualified dividends and net long-term gains. Check “yes” if you can use the simpler worksheet.
Does this apply to you?
- You have a net capital gain on line 16 and no amounts on lines 18 or 19
- You have qualified dividends reported on Form 1040 line 3a
- This line determines which worksheet or schedule you use to compute your actual tax
Easy to overlook
The Qualified Dividends worksheet gives you a lower tax rate automatically This worksheet is not optional if you have qualified dividends or long-term capital gains. Using the regular tax tables instead means you pay ordinary income rates on income that qualifies for the lower 0%/15%/20% rates. Tax software handles this automatically, but paper filers sometimes skip the worksheet. 1 General filing pattern — qualified dividends tax rate confusion
If lines 18 or 19 have amounts, you use Schedule D Tax Worksheet instead The simpler Qualified Dividends worksheet only works when all your gains are at the standard long-term rate. If you have depreciation recapture (line 18) or collectibles gains (line 19), you must use the longer Schedule D Tax Worksheet on line 21 to apply the correct rates to each category. 2 IRS Schedule D instructions — Line 20
Watch out for this
Paper filers who skip this worksheet and use the standard tax table pay significantly more tax than they owe. The tax table applies ordinary income rates to everything, including qualified dividends and long-term gains that should be taxed at 0%, 15%, or 20%. Tax software applies the worksheet automatically, which is why this mistake is almost exclusively a paper-filing issue.
Footnotes
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IRS Schedule D (Form 1040) Instructions. See also IRS Publication 17, Your Federal Income Tax. https://www.irs.gov/pub/irs-pdf/p17.pdf ↩
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IRS Schedule D (Form 1040) Instructions, Line 20. https://www.irs.gov/instructions/i1040sd ↩