In: Finance
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 ________
Answer : No of Shares purchased : 100
Share Price : $ 107.69
At the end of Year 1 :
Dividend received is $1.50 per share
Share price at 113.03, capital gains per share is 113.03 - 107.69 = $5.34
Earnings through dividend is 150 and Earning through share price is $534
At the end of year 2 :
Dividend received is $1.65 per share
Share price at 113.03, capital gains per share is 123.24 - 113.03 = $10.21
Earnings through dividend is 165 and Earning through share price is $1021
The Total Investment income (Pre-taxes) is $1870
Taxes to be paid is $523.6
We have not sold the shares at the end of the 1st year so effective tax at capital gains would be 0 and we would have to pay only dividend tax.
And the net Capital gains effective tax at the end of the second year would be $435 (only capital Gains)
Amount | Taxes Owed | Effective taxes | ||
Year 1 | Dividends | 150 | 42 | 42 |
Capital Gains | 534 | 149.52 | 0 | |
Year 2 | Dividends | 165 | 46.2 | 46.2 |
Capital Gains | 1021 | 285.88 | 435 |