Question

Two years ago, Tim purchased 100 shares of a particular company's stock at a price of $65.50 per share. Last year, Tim received an annual dividend of $1.45 per share, and at the end of the year, a share of stock was trading at $70.57 per share. This year, Tim received an annual dividend of $1.60 per share and afterward sold all 100 shares at a price of $80.78 per share. In the first column of the following table, enter the total annual dividends Tim received each year, as well as the total capital gains at the end of each year. Suppose Tim is in the 28% tax bracket. Compute the taxes Tim pays each year on dividends and capital gains from this investment by completing the second column in the table. Calculating Taxes Owed on Tim's Investment Amount Taxes Owed Year 1 Dividends: Capital Gains: Year 2 Dividends: Capital Gains: The total amount of investment income (pre taxes) that Tim earned on this investment over the course of 2 years is The total amount that Tim pays in taxes on income from this investment income is

Answer 1

Calculating Taxes Owed on Tim's investment Amount Taxes owed Year 1 Dividends: $145 $40.60 Capital gains: $0 Year 2 Dividends: Capital gains $160 $1,528 $44.80 $427.84

Computations are shown below:

Number of shares purchased=100

Stock price(2 years ago)=$65.50

For first year:

Annual dividend per share=$1.45*100

Annual dividend per share=$145

Tax rate =28%

Tax on dividend=$145*28%

Tax on dividend=$40.60

Capital gain=$0 (as no shares are sold, there will be no capital gain)

For second year

Annual dividend per share=$1.60*100

Annual dividend per share=$160

Tax rate=28%

Tax on dividend=$160*28%

Tax on dividend=$44.80

Stock price=$80.78

Capital gain per share=$80.78-$65.50

Capital gain per share=$15.28

Total capital gain =100*$15.28

Total capital gain=$1,528

Tax on capital gain=28%*$1,528

Tax on capital gain=$427.84

Total amount of investment income earned by Tim in the course of 2 years can be computed as:

Dividend for 1st year +Dividend of 2nd year+Capital gain

=$145+$160+$1,528

=$1,833

Thus, Total amount of investment income earned by Tim in the course of 2 years=$1,833

Total amount of taxes paid by Tim on investment income can be computed as:

Tax on dividend for 1st year+Tax on dividend for 2nd year+Tax on capital gain

=$40.60+$44.80+$427.84

=$513.24

Thus, Total amount of taxes paid by Tim on investment income=$513.24