2021 Financial Changes

After the COVID-19 pandemic began in 2020, this led to an economic fallout including a 5% reduction in gross domestic product, inflation, and unemployment. Recovery in the economy has however been witnessed in the third quarter of 2020. Gross domestic product is important to the economy as it measures the nation's production of goods and services. According to the federal open market committee, GDP is expected to grow from 2.4% in 2020 to 4.2% this year. Below are the discussions on financial changes in 2021.

Economic Growth

According to the Federal Open Market Committee (FOMC) in a meeting held on 16th December 2020, Gross Domestic Product will rise in 2021. It is estimated to increase up to a 4.2 growth rate and later constrict to 3.5% next year.

Unemployment

According to the Federal Open Market Committee, the unemployment rate will gradually decline from the current 6.7% rate to 5%. The real unemployment rate you probably see today includes the marginally attached, underemployed, and discouraged workers.

Inflation

Inflation is defined as the decrease in the purchasing power of a given currency over a specific time. Inflation is used by the United Nations Department of Economic, Organization for Economic Co-operation and Development (OECD), to give inflation rate based on the Consumer Price Index (CPI).

The inflation rate depends upon the balance of supply and demand within the economy at a given period. The economy does best when there is stable and predictable inflation. If inflation is too high or too low that translates to an economic crisis. For example, when the cost of living rises, companies should raise salaries as well. High inflation means that prices are hiking quickly and the ability to buy goods and services becomes hard because the dollar cannot stretch that far.

Federal Open Market Committee in a meeting held on 11th December 2020, predicted that the inflation rate will rise to 2.0 percent in 2021 from 1.9% in 2020. They said that the rate will stabilize throughout 2021. This will be brought by the high level of unemployment, according to the Bureau of Labor Statistics (BLS) and Bureau of Economic Analysis (BEA) the US CPI inflation is highly likely to rise.

Interest Rates

FOMC stated that due to the impact COVID 19 pandemic has on the economy, the funds' rate was lowered to a range of 0 percent and 0.25 percent. Federal Open Market Committee announced on 16th September 2020 that they intend to keep the benchmark rate at its current lower level of 0.1 percent for a long time. Federal Open Market Committee said it would not be changed until at least 2023.

The Fed is now working on keeping the rates low for a longer time to keep borrowing money cheaper thus encouraging consumer and business spending. The quantitative easing program (QE) which was started early last year is expanded to an unlimited amount. The federal bought 500 billion US dollars treasuries and 200 billion US dollars for mortgage securities. As a result, its balance sheet in June 2020 had grown to 7.2 trillion US dollars and late in 2020 reached a figure close to 7.4 trillion US dollars. This reduced supply which increased the prices.

Oil and Gas Prices

The outlook provided by the U.S Energy Information Administration (EIA) for the period 2020 to 2050 predicts a high rise in the prices of oil. The price of crude oil will cost 49 US dollars per barrel in 2021.

According to data provided by the Energy Information Administration is that Oil and gas are expected to rise, and an average oil price could rise to 183 US dollars by 2050. This will result from the exhaustion of crude oil from cheap sources of oil.

401(K) Contributions

Employee 401(K) contributions plan for the year 2021 will be $19,500 and an additional $6,500 contribution allowed for those individuals turning the age of 50 years or older. The maximum contributions for both the employer and employee will rise by $1,000

According to an announcement by the IRS is that there is a high chance that the few defined contribution and defined benefit plans will be reviewed upward for both individual retirement plans and employer-sponsored retirement plans.

There is no charge for employee contributions to 401(K) and the elective deferral limit. Just like in last year (2020), the contribution will be $500 and a $500 rise in the catch-up. What this means is that the contribution limit for the year 2021 will pretty much remain the same as it was in the year 2020. The only significant difference is the annual additions limit that will be between $57,000 to $58,000.

For defined contribution retirement plans and annual contribution limits are generally reviewed and adjusted each year to include factors such as inflation into account. If inflation is sufficient to trigger the increments, the limit will therefore be adjusted in 2022.

IRS announced the sponsors of defined benefit pension plans that starting January 1st, 2021 the annual benefit limit stays unchanged and will stay at $230,000

Tax rates

The Internal Revenue Service (IRS) released a breakdown for the year 2021 income tax rates. Every year the tax brackets (which include 10%, 12%, 22%, 24%, 32%, 35$, and 37% are adjusted to reflect inflation. Tax brackets are magical because the different amounts of income up to a specified amount are taxed using a different rate. The following rate is the effect for 2021 and will directly affect your return for the year 2022.

For the 2021 plan year, the top tax rate will be 37% and shall only apply to those persons with an income over $523,600 for those individuals who are married will file jointly to the amount of $628,300.

The case of single filers with an income of over $209,425 shall fall into the 35% tax bracket. And to those who are married will have a joint filling of $418,850.

Single filers with an income of $164,925 and if married they will have a joint filling of $329,850 will fall under the 32% bracket, while the 24% tax bracket will apply to taxpayers earning over $86,375 and if married a filling joint of $172,750 will be allowed.

Single individuals with income exceeding $40,525 or those married with a joint filling of $81,050 will fall under the 22% bracket. For 12% bracket will apply to single taxpayers earning over $9,950 and if married a joint filling of $19,900 will be allowed.

10% which is the lowest rate shall apply to singles earning under $9,950 and for married a joint filing of $19,900 will be allowed.