Question

4. Paying taxes on stocks

What It Means to Invest in Stocks?

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, Akshay purchased 100 shares of a particular company’s stock at a price of $107.57 per share. Last year, Akshay received an annual dividend of $1.55 per share, and at the end of the year, a share of stock was trading at $115.32 per share. This year, Akshay received an annual dividend of $1.71 per share and afterward sold all 100 shares at a price of $125.53 per share.

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

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

Calculating Taxes Owed on Akshay’s Investment

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

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

.The total amount that Akshay pays in taxes on income from this investment income is

.

Answer 1

Calculation of income in year 1

Dividend income

Shares = 100

Dividend = $1.55 per share

Dividend Income = $155

As shares are not sold in year 1. So no capital gain arises in year 1 even if the share price increases from 107.57 to 115.32.

Tax is paid on the dividend income of $155 earned

Tax = 28%

Tax owed = 155 * 28% which is $43.4  

Calculation for year 2

Shares owned = 100

Dividend = $1.71

Dividend earned = $171

Tax owed = $171 * 28% which is $47.88

Calculation of income from capital gain in year 2

Total cost of shares = 100* $107.57 which is $10757

Total amount received from selling shares = 100 * $125.53 which is $12553
Capital gain = $12553 - $10757 which is $1796

Tax owed from capital gain = $1796 * 28% which is $502.88

FINAL ANSWER IS:

		Amount	Tax owed
Year 1	Dividends	$155	$43.4
	Capital Gains	0	0
Year 2	Dividends	$171	$47.88
	Capital Gains	$1796	$502.88

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