Upon completion of this lesson, the successful participant will be able to: Explain how interest income and dividend income are taxed; compute the tax consequences associated with the disposition of capital assets, including the netting process for calculating gains and losses; describe common sources of tax-exempt investment income and explain the rationale for exempting some investments from taxation; | Chapter 11 Investments Learning Objectives Explain how interest income and dividend income are taxed Compute the tax consequences associated with the disposition of capital assets, including the netting process for calculating gains and losses Describe common sources of tax-exempt investment income and explain the rationale for exempting some investments from taxation Calculate the deduction for portfolio investment-related expenses, including investment expenses and investment interest expense Understand the distinction between portfolio investments and passive investments and apply tax basis, at-risk and passive activity loss limits to losses from passive investments Investments Overview Before-tax rate of return on investment After-tax rate of return on investment Depends on when investment income is taxed Relates to timing tax planning strategy Depends on the rate at which the income is taxed Relates to the conversion tax planning strategy Portfolio vs. Passive investments . | Chapter 11 Investments Learning Objectives Explain how interest income and dividend income are taxed Compute the tax consequences associated with the disposition of capital assets, including the netting process for calculating gains and losses Describe common sources of tax-exempt investment income and explain the rationale for exempting some investments from taxation Calculate the deduction for portfolio investment-related expenses, including investment expenses and investment interest expense Understand the distinction between portfolio investments and passive investments and apply tax basis, at-risk and passive activity loss limits to losses from passive investments Investments Overview Before-tax rate of return on investment After-tax rate of return on investment Depends on when investment income is taxed Relates to timing tax planning strategy Depends on the rate at which the income is taxed Relates to the conversion tax planning strategy Portfolio vs. Passive investments Portfolio losses deferred until investment is sold Passive losses may be deducted annually Portfolio Income: Interest and Dividends Usually taxable when received Interest from bonds CDs, savings accounts Ordinary income taxed at ordinary rate unless municipal bond interest Interest from . Treasury bonds not taxable by states Dividends on stock Typically taxed at preferential capital gains rate Portfolio Income: Dividends Qualified Dividends Dividends must be paid by domestic or certain foreign corporations that are held for a certain length of time Subject to preferential tax rate 15% generally 0% if would have been taxed at 10% or 15% if it had been ordinary income 20% if would have been taxed at if it had been ordinary income After tax rate of return assuming 8% before-tax rate of return .08(1 - .15) = Nonqualified dividends are taxed as ordinary income Investments held for appreciation potential Gains deferred for tax purposes Generally taxed at preferential rates
