To determine which investment provides the greatest after-tax amount for each investor, we need to look at the tax treatment for each type of income and calculate the after-tax amount based on their respective tax rates.

Given Assumptions:

• All investors have other taxable income of $100,000.
• We assume the investments have been held for 3 or more years, meaning qualified dividends and long-term capital gains tax rates apply.
• There are no state taxes, commissions, or sales charges involved.

Types of Income:

1. Investor A: $2,000 in qualified dividend income.
2. Investor B: $2,000 in interest income from a certificate of deposit (CD).
3. Investor C: $2,000 in long-term capital gains from the sale of appreciated stock.

Federal Tax Rates for the Given Income Level:

• Qualified Dividends: Qualified dividends are taxed at the same rate as long-term capital gains. Based on the taxable income of $100,000, the long-term capital gains tax rate will likely be 15% for Investor A.
• Interest Income: Interest income is taxed at ordinary income tax rates, which would be the marginal tax rate for someone with $100,000 in taxable income. Based on the 2023 tax brackets, this would likely fall in the 24% tax bracket for Investor B.
• Long-Term Capital Gains: Long-term capital gains are taxed at a special rate, likely 15% for Investor C, similar to qualified dividends.

After-Tax Calculations:

1. Investor A (Qualified Dividends):

• Qualified dividends are taxed at 15%.
• Tax on $2,000 = $2,000 × 0.15 = $300.
• After-tax amount = $2,000 - $300 = $1,700.

2. Investor B (Interest Income):

• Interest income is taxed at the marginal income tax rate (24%).
• Tax on $2,000 = $2,000 × 0.24 = $480.
• After-tax amount = $2,000 - $480 = $1,520.

3. Investor C (Long-Term Capital Gains):

• Long-term capital gains are taxed at 15%.
• Tax on $2,000 = $2,000 × 0.15 = $300.
• After-tax amount = $2,000 - $300 = $1,700.

Comparison of After-Tax Amounts:

• Investor A (Qualified Dividends): $1,700
• Investor B (Interest Income): $1,520
• Investor C (Long-Term Capital Gains): $1,700

Conclusion:

Both Investor A (qualified dividends) and Investor C (long-term capital gains) will receive the highest after-tax amount of $1,700. Investor B, who received interest income, has the lowest after-tax amount of $1,520 because interest is taxed at the higher ordinary income tax rate.

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Do you have any questions or need more details on any part of this explanation?

Here are 5 related questions you might want to consider:

1. How would the results change if the investors had lower taxable income, say $50,000?
2. What are the tax implications if the interest income was earned from a municipal bond?
3. How does the holding period affect the tax treatment of dividends or capital gains?
4. What if Investor C had a short-term capital gain instead of a long-term one?
5. How would state income taxes impact the after-tax results?

Tip: Holding investments for over a year qualifies gains as long-term, which often leads to lower tax rates than short-term gains taxed as ordinary income.