Question

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 recelved 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 eac h 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 Taxes Owed Amount Year 1 Dividends: Capital Gains: Dividends: Year 2 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 $ Save &Continue Grade It Now

Answer 1

An investor earns from stocks through dividends and capital gains. Clancy received a total of $368 in dividends over two years and made a capital gain of $1,442 after selling the shares. The total tax owed on this investment income is $633.50, assuming a 35% tax bracket.

Step-by-step explanation:

When investing in stocks, an investor can expect two types of returns: dividends and capital gains. Dividends are direct payments made to shareholders from the company's profits, while capital gains are the profits made when selling the stock for more than the purchase price. In the case of Clancy, let us calculate both dividends received and capital gains for each year, followed by the taxes owed on those amounts.

In Year 1, Clancy received dividends of 100 shares x $1.75 per share = $175. There were no capital gains because Clancy did not sell the stock.

In Year 2, Clancy again received dividends of 100 shares x $1.93 per share = $193. Additionally, Clancy sold the stock for a capital gain: (100 shares x $150.97) - (100 shares x $136.55), totaling $1,442 in capital gains.

Now, calculating the taxes owed, considering Clancy is in the 35% tax bracket: For dividends, Year 1 taxes = $175 x 35% = $61.25, and Year 2 taxes = $193 x 35% = $67.55. For capital gains, Year 2 taxes = $1,442 x 35% = $504.70.

The total pre-tax investment income over two years is $175 (dividends from Year 1) + $193 (dividends from Year 2) + $1,442 (capital gains from Year 2) = $1,810. The total taxes on this investment income amounts to $61.25 + $67.55 + $504.70 = $633.50.