Common stock is considered to be one of the most popular investment vehicles for

Question

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, Jared purchased 100 shares of a particular company's stock at a price of $65.56 per share. Last year, Jared received an annual dividend of $1.90 per share, and at the end of the year, a share of stock was trading at $70.85 per share. This year, Jared received an annual dividend of $2.09 per share and afterward sold all 100 shares at a price of $81.06 per share. In the first column of the following table, enter the total annual dividends Jared received each year, as well as the total capital gains at the end of each year. suppose Jared is in the 35% tax bracket. Compute the taxes Jared pays each year on dividends and capital gains from this investment by completing the second column in the table. Calculating Taxes Owed on Jared's Investment Amount Taxes Owed Year Dividends: Capital Gains: Year 2Dividends: Capital Gains: The total amount of investment income (pre taxes) that Jared earned on this investment over the course of 2 years is The total amount that Jared pays in taxes on income from this investment income is

Explanation / Answer

Computation of Income from Dividend:

Year 1: 100 * $1.90 = $190

Year 2: 100 * $2.09 = $209

Tax on dividend income: (190+209) * 35% = $139.65

Income from Capital Gain:

Profit: 81.06 - 65.56 = $15.5/share

Total profit: 100 * 15.5 = $1550

Tax on Capital gain: 1550 *35% = $542.50

Total Investment income (Pre tax): 190 + 209 + 1550 = $1949

Tax on Investment income = $682.15

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