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Taxes on Investments Tutorial

Suppose Dylan is a single taxpayer with [tex]$\$ 46,800$[/tex] of taxable income this year. He recently sold some stock that he's held for two years, which paid qualified dividends. We can use ROI to compare the effect of taxes on Dylan's return from his investment. We will use this pretax information:

- Dividends paid this year: [tex]$\[tex]$ 5$[/tex][/tex]
- Capital gains (excluding dividends) from investment: [tex]$\$ 25$[/tex]
- Cost of investment: [tex]$\[tex]$ 125$[/tex][/tex]

[tex]\[
\begin{tabular}{|c|c|c|}
\hline
Tax Rate & Income Bracket \\
\hline
10\% & $0 - 9,525$ \\
12\% & $9,526 - 38,700$ \\
22\% & $38,701 - 82,500$ \\
24\% & $82,501 - 157,500$ \\
32\% & $157,501 - 200,000$ \\
35\% & $200,001 - 500,000$ \\
37\% & $\ \textgreater \ 500,000$ \\
\hline
\end{tabular}
\][/tex]

Part A

Considering both dividends paid and capital gains, Dylan's pretax profit from his investment is [tex]$\$ \square$[/tex].

Dylan's pretax return on investment (ROI) is [tex]$\square\%$[/tex].

Type the correct answer in each box. Use numerals instead of words.



Answer :

GinnyAnswer
Let's solve the given problem step by step:

### Part A

To find both the pretax profit and the pretax return on investment (ROI) for Dylan's investment, we will use the following information:

- Dividends paid this year: \[tex]$5 - Capital gains (excluding dividends) from investment: \$[/tex]25
- Cost of investment: \[tex]$125 #### Step 1: Calculate Dylan's pretax profit from his investment To find the pretax profit, we simply add the dividends paid and the capital gains. \[ \text{Pretax Profit} = \text{Dividends Paid} + \text{Capital Gains} \] Given: - Dividends Paid = \$[/tex]5
- Capital Gains = \[tex]$25 \[ \text{Pretax Profit} = 5 + 25 = \$[/tex]30
\]

So, Dylan's pretax profit from his investment is \[tex]$30. #### Step 2: Calculate the pretax return on investment (ROI) The ROI is calculated using the formula: \[ \text{ROI (\%)} = \left( \frac{\text{Pretax Profit}}{\text{Cost of Investment}} \right) \times 100 \] Given: - Pretax Profit = \$[/tex]30
- Cost of Investment = \[tex]$125 \[ \text{ROI (\%)} = \left( \frac{30}{125} \right) \times 100 = 0.24 \times 100 = 24\% \] So, Dylan's pretax return on investment (ROI) is 24%. ### Summary for Part A - Dylan's pretax profit from his investment is \$[/tex]30.
- Dylan's pretax return on investment (ROI) is 24%.

Let's fill the required answers in the boxes:

- Dylan's pretax profit from his investment is \$30.
- Dylan's pretax return on investment (ROI) is 24%.