Chapter 7, Problem 1DQ

Describe how interest income and dividend income are taxed. What are the similarities and differences in their tax treatment?

To determine

Explain the way interest income and dividend income are taxed and also provide the similarities and difference in their tax treatment.

Explanation of Solution

Interest income is the amount of income that is generated form investments, such as savings account, bonds and certificates of deposits.

Dividend income is the amount of return earned from investments like equity investment and mutual funds.

Interest income and dividend income are cash method of tax payers. Individuals are imposed with tax even when they receive interest or dividend. However, tax is charged on interest income at ordinary rates and at dividends at lower level capital gain rates.