Question

1. Interest income, dividend income, and capital gains income
   1. The textbook refers to interest income being taxed as ordinary income. Explain what is meant by ordinary income and what this means for tax purposes. (1 mark)
   2. Explain why dividend income may have a preferred tax treatment. (1 mark)

Explain the difference between a capital gain and a taxable capital gain by defining the percentage of capital gains (often referred to as the inclusion rate) an investor is taxed on. (1 mark)

Answer 1

Answer(a): Ordinary Income- It is the income that is taxed at a normal tax rate. Most of the Interest income is taxable as ordinary income on the federal tax return. Ordinary income is the income that is taxed at the nomal U.S. Tax rates.

Long term capital gains or any increase in the value of investment that is for more one year and qualified dividends are taxed differently and not considered the ordinary income.

Answer(b): Dividend income- It is a part of company's profit that is distributed to the shareholders. Dividend income can be from common stock or preferred stock. It is treated as Ordinary dividend. Qualified dividends are the amounts that are taxed as Capital gains. Most of the preferred dividends are considered as Qualified dividends. As per current taxation law, qualified dividends are taxed at the rate of 0%, 15% and 20% as per your tax slabs.

Capital gain- It is the gain from a property or shares. It is the appreciation in the value of an asset. If asset is sold then only capital gain taxed will be levied otherwise not, capital gain tax is not applicable on the appreciation of asset until sold. Capital gains tax rates are 0%. 15%, and 20% as per your tax bracket.