The Qualified Dividend and Capital Gains Worksheet will calculate the income tax on both the line 5 amount and the line 1 amount.
The separately applied capital gains tax rate for the portion of income due to the capital gains or qualified dividends is added to the income tax calculated for line 5 (all income minus the capital gains/qualified dividends). Then this total income tax is compared to the income tax calculated for line 1 (total income).
The smaller of the two tax calculations is then transferred to Form 1040.
Specifically, the tax amount on line 23 of the worksheet represents the income tax for the line 5 amount plus the capital gains tax for the income eligible for the lower tax rate. The tax amount on line 24 of the worksheet represents the income tax for the line 1 amount. Either line 23 or line 24, whichever is lower, is transferred to Form 1040.
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