Question

Alonzo’s income puts him in the third tax bracket (25%) last year. During the same year, he earned $325 in dividends and $100 in coupons on a municipal bond. Five years ago, he purchased a common stock for $275. He sold the same stock last year for $545. What is the total Alonzo will pay in taxes on last year’s investments?

Answer 1

@mathstudent55

Answer 2

so it would be a gain of 270 that i would calculate tax on along with $100 in coupons correct?

Answer 3

Thanks.
Once again, let's collect the information we need.

1. He is in the 25% tax bracket
2. $325 income from dividends
3. $100 income on bond coupon
4. He bought stock 5 years ago and sold last year.
That means this is considered long term, more than one year.
He sold for $545 and bought for $275
$545 - $275 = $270 long term capital gains

Now look at each amount she made and what it's from and how much tax she has to pay on it. That's what the table shows.

Answer 4

You are correct that he has to pay tax on $270 capital gains and $100 in coupons, but don't forget also the $325 in dividends. Since he is not in the bottom two brackets, the dividend income is taxed at 15%.

Answer 5

thats the part i wasn't sure on

Answer 6

Are you told what is the tax rate on capital gains?

Answer 7

yes its the same chart as the other question

Answer 8

I see. Since he held it more than 1 year, capital gains is taxed as dividend income, 15%.

Answer 9

i found my mistake ! the $100 is a municipal bond which doesnt get taxed so instead of my answer being 99.25 its 89.25

Answer 10

Good point. I missed that.
Ok, now we can write the amounts and the corresponding tax rates:

$325 income from dividends Taxed at 15% rate
$100 income on municipal bond coupon Not taxed
$270 long term capital gains Taxed at 15% rate

Answer 11

15% * $325 = $48.75
15% * $270 = $40.50
-------------------
Total tax: $89.25

Answer 12

Good job, @lay_lay396 !