April 22, 2024
Question:
My refund for taxes was much lower this year than it has been in the past, did tax rates or brackets change this year?
Answer:
We've witnessed this a lot this year, but it actually doesn't have much to do with tax brackets or rates. There were three big areas we saw that increased in 2023: Interest, Dividends and Capital Gain Distributions.
With interest rates on money market much higher than past years, it has been great that we've been able to earn some real return on our cash, but that interest is taxed at your ordinary income tax rate and you don't have any taxes withheld from that interest when you earn it.
Dividends were up a bit this year too, we saw both individual stocks, mutual funds and ETFs generate more in dividends year over year. If the dividends are qualified, they do get taxed at the capital gains tax rate (15% - 20%), but again, no taxes are withheld when you earn those dividends (unless it is a foreign dividend).
Capital gain distributions from mutual funds were up a bit this year too. Mutual funds don't have to pay income tax on internal gains, but they do have to push those gains out to the shareholders. We generally get estimates towards the end of the year, but they are only estimates, so the final number is different. That doesn't mean you sold anything at a gain, it means the mutual fund did and they are passing it on to you, but no taxes are withheld from those distributions.
When you add all of those items up, it's likely that you just earned more this year (meaning your liability was more) and because it was from areas that no taxes were withheld, it had to be netted out of your refund.
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