I have been getting so many calls and emails from clients stating that they are so happy that their investments have done so well, but also cannot understand why they have to pay so much more in taxes this year. There are actually a couple of reasons why.
First, for my clients that have to take Required Minimum Distributions there was a double whammy. First off was the CARES Act which stated In Section 2203 titled, “Temporary Waiver of Required Minimum Distribution Rules for Certain Retirement Plans and Accounts,” those who are typically required to take minimum distributions from their retirement savings accounts will not be required to do so for the remainder of 2020. So no one had to take the RMD in 2020 which allowed the account to grow. When calculating the RMD for 2021, it was on a larger than expected balance.
Second, in 2021 a large number of mutual funds paid record gains:
604 funds are estimating distributions of over 10%;
• 123 funds are estimating distributions of over 20%; and
• 25 funds are estimating distributions of over 30%.
While capital gains are not taxed at the same rate as ordinary income, the gains were generally larger than previous years.
So I am happy to do my job successfully for my clients and don’t like the IRS any more than they do.