Investments and Income Taxes
“It’s not what you earn, but what you keep”
1. What is a capital gain? What is a long-term capital gain? Short-term capital gain?
2. If you are in the 25% or greater tax bracket, long term capital gains are taxed at what rate? Short term capital gains?
3. If you are in the 15% or lower tax bracket, long term capital gains are taxed at what rate? Short term capital gains?
4. You bought 100 shares of Home Depot stock at a price of $20 per share approximately two years ago. You still own the stock; its value today is $40 per share. This year, how much will you pay in taxes on the profit of this stock? Be careful—don’t work too hard.
5. You bought 100 shares of Home Depot stock at a price of $20 per share approximately two years ago. You sell the stock today at $40 per share. How much money did you make on a before-tax basis? How much money did you make on an after-tax basis? You are in the 25% tax bracket. Be careful, this is a long-term capital gain.
6. You bought 100 shares of Home Depot stock at a price of $20 per share approximately nine months ago. You sell the stock today at $40 per share. How much money did you make on a before-tax basis? How much money did you make on an after-tax basis? You are in the 25% tax bracket.
7. You, a North Carolina resident, have an opportunity to buy a Microsoft Bond that will give you an annual before-tax return of 7%. You could also buy a city of High Point bond that will pay 4.5% annually. You are in the 35% Federal and 7% state tax brackets. Which investment will give you the greatest after-tax (percentage) return?
8. You average 10% before-tax annually investing in stocks; however, you never hold your stocks more than a year. You are in the 32% tax bracket, federal and state combined. Inflation is 3%. What is your after tax return? What is your real (after inflation) after tax return?
9. You are a day trader. You average 14% annually. Your uncle invests in a stock that doesn’t pay dividends. The stock has been appreciating at 12% annually. Your uncle believes a 12% annual return will continue. Your uncle will sell all the stock in 20 years. You and your uncle are in the 25% Federal and 7% State tax brackets. Assuming equal risk, who is performing better? Assume the state capital gains tax equals 7%. Explain. What is the lesson? Note: To help you with this problem you may want to assume both you and your uncle start with $10,000 today.
10. Dollar-cost averaging: You buy $10,000 worth of stock every year. Last year, you bought at $40 per share. This year, you will buy at $50 per share. What is your average share price? Show your work. What is the lesson in this problem? (10 points)
11. You own $100,000 of a stock mutual fund. The last three years the fund and the S&P’s 500 stock index have decreased 10%, 15%, and 7%, respectably. You just inherited $10,000. You are considering investing the money in the stock mutual fund, bond fund, or just depositing it into a savings account. What would you do? Explain.