Question

3. 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, 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 $150.97 per share. In the first column of the following table, enter the total annual dividends Clancy received each year, as well as the total capital gains at the end of each year Suppose Clancy is in the 35% tax bracket. Compute the taxes Clancy pays each year on dividends and capital gains from this investment by completing the second column in the table. Calculating Taxes Owed on Clancy's Investment Amount Taxes Owed Dividends: Year 1 Capital Gains: Year 2 Dividends: S Capital Gains: The total amount of investment income (pre taxes) that Clancy earned on this investment over the course of 2 years is$ The total amount that Clancy pays in taxes on income from this investment income is

Answer 1

Ans:- 3 In this question, we have to find the Dividends and capital gains received by Clancy in year 1 and year 2 and the tax owned by Clancy in the year 1 and year 2.

First, let us calculate the dividends received by Clancy in year 1 and 2.It is given in the question that two years ago Clancy purchased 100 shares of a particular company and she received a dividend of $1.75 in the first year and $1.93 in the second year. Therefore the dividend received by Clancy will be

Year 1 100*$1.75 = $175

Year 2 100*$1.93= $193.

Now the tax rate on dividend owed by Clancy in year 1 and year 2 will be 35% as per the question.

Year 1 tax rate on Dividend 175*35%= $61.25

Year 2 Tax rate 193*35%= 67.55

Now calculating the capital gain received by Clancy in year 1 and Year 2. It is given in the question that she purchased the company's stock at a price of $136.55 per share and the price at the end of the year was $140.76.Therefore the capital gain will be the difference in the price multiplied by the number of shares.

Capital gain year 1 (140.76-136.55)*100 = $421

In year 2 it is given that she sold the shares at a price of $150.97.The capital gain at the end of year 2 will be the difference between the price she sold and the price of shares at the end of year 1

capital gain year 2 (150.97-140.76)*100=$ 1021

Tax amount on the capital gain in year 1  421*35%= 147.35

  Tax amount in year 2 will be 1021*35%=357.35.

Now the total amount earned by Clancy over 2 years before tax or pretax will be ( 175+193+421+1021)= $1810.

The total amount paid by Clancy in taxes is (61.25+67.55+147.35+357.35) =633.50