Question

# Common stock is considered to be one of the most popular investment vehicles for long-term wealth...

Common stock is considered to be one of the most popular investment vehicles for long-term wealth building. Investors earn income from common stock in the form of dividends and/or capital gains. As an investor it is important to understand the implications of investing in stocks from a tax perspective.

Two years ago, David purchased 100 shares of a particular company's stock as a price of \$107.69 per share. Last year, David received an annual dividend of \$1.50 per share, and at the end of the year, a share of stock was trading at \$113.03 per share. This year, David received an annual dividend of \$1.65 per share and afterward sold all 100 shares at a price of \$123.24 per share.

In the first column of the following table, enter the total annual dividends David received each year, as well as the total capital gains at the end of each year.

Suppose David is in the 28% tax bracket. Compute the taxes David pays each year on dividends and capital gains from this investment by completing the second column in the table.

Calculating taxes owed on David's Investment

 Amount Taxes Owed Year 1 Dividends: ______ ______ Capital Gains: ______ ______ Year 2 Dividends: ______ ______ Capital Gains ______ ______

The total amount of investment income (pre taxes) that David earned on this investment over the course of 2 years is ___________.

The total amount that David pays in taxes on income from this investment income is ________

#### Homework Answers

Answer #1

YEAR 1

Dividend David received in year 1 = 1.50/share * 100 shares = USD 150

Tax owed on dividend = 28% of USD 150 = USD 42

Capital gains in year 1 = 113.03 - 107.69 = USD 5.34 *100 = USD 534

Tax owed on capital gains in year 1 would be ZERO since the capital gain is not yet realized and there is no tax on unrealized capital gains.

YEAR 2

Divided received in year 2 = 1.65/share * 100 shares = USD 165

Tax owed on dividend = 28% * USD 165 = USD 46.20

Capital gains in year 2 = USD 123.24 - USD 113.03 = USD 10.21 *100 = USD 1,042

Tax owed on capital gains in year 2 = 28% of (USD 123.24 - USD 107.69) = USD 4.35 *100 = USD 435.40

Amount of investment income earned over 2 years (pre tax) = USD 150 + USD 165 + USD 534 + USD 1,021 = USD 1,870

Total taxes David pays in taxes = 28% of USD 1,870 = 523.60 (42+ 46.20+ 435.40)

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