Question

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, Clancy purchased 100 shares of a particular company’s stock at a price of $136.55 per share. Last year, Clancy received an annual dividend of $1.75 per share, and at the end of the year, a share of stock was trading at $140.76 per share. This year, Clancy received an annual dividend of $1.93 per share and afterward sold all 100 shares at a price of $150.97 per share.

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

Suppose Clancy is in the 35% tax bracket. Compute the taxes Clancy pays each year on dividends and capital gains from this investment by completing the second column in the table.

Amount	Taxes Owed
Year 1	Dividends:
	Capital Gains:
Year 2	Dividends:
	Capital Gains:		The total amount of investment income (pre taxes) that Clancy earned on this investment over the course of 2 years is. The total amount that Clancy pays in taxes on income from this investment income is.

Answer 1

Solution:

First look into the table below for summary:

Initial investment made by Clancy was (136.55*100) $ 13,655.0.

Year 1, divdend of $ 1.75 was received (1.75*100) = $ 175.0 and in Year 2, (1.93*100) = $ 193.0

Value of stock in Year 1 reached to $ 140.76, henve investment value was (140.76*100) = $14,076.0

Please be note that since there was no shares sold in Year 1, hence not tax on capital gain is applicable.

Value of stock in Year 2 reached to $ 150.97, henve investment value was (140.76*100) = $15,097.0

Since stock sold in Year 2, hence capital gain tax will be applicable in Year 2.

	Year 0	Year 1	Year 2	Total
Investment	13,655.0
Dividend received		175.0	193.0
Investment value		14,076.0	15,097.0
Tax on dividend		(175*.35) 61.3	(193*.35) 67.6	128.8
Net dividend		(175-61.3) 113.8	(193-67.6) 125.5
Capital gain			(15,097-13,655) 1,442.0
Tax on capital gain			(1,442*.35) 504.7	504.7
Net capital gain			(1,442-504.7) 937.3
Total gain pre tax		175.0	(193+1,442) 1,635.0	1,810.0
Total gain post tax		113.8	=(125.5+937.3) 1,062.8	1,176.5

Amount Taxes owned
Year 1		Year 2		Total (Year 1 + Year 2)
Dividend	61.25	Dividend	67.55	128.8
Capital gain	0	Capital gain	504.7	504.7
Total tax	61.25		572.25	633.5

The total amount of investment income (pre taxes) that Clancy earned on this investment over the course of 2 years is.
Year 1		Year 2		Total
Dividend	175.0	Dividend	193.0	Dividend	368.0
Capital gain	*421.0	Capital gain	^1,021.0	Capital gain	1,442.0
Total	596.0	Total	1,214.0		1,810.0
The total amount that Clancy pays in taxes on income from this investment income is.
Year 1		Year 2		Total
Dividend tax	61.3	Dividend tax	67.6	128.8
Capital gain tax	-	Capital gain tax	(1,442*.35) 504.7	504.7
Total	61.3		572.2	633.5

*Value of stock in Year 1 was $ 140.76. Hence unrealized capital gain is (140.76-136.55)*100 = $421.0

^Value of stock in Year 2 was $ 150.97. Hence unrealized capital gain is (150.97-140.76)*100 = $1,021.0

Tax on capital gain = Price at which investment was sold - Investment price