There is a tax-advantaged way for taxpayers to save for the
needs of family members with disabilities, without losing eligibility for other
government benefits to which those individuals are entitled. This can be done
though an ABLE account, which is a tax-free account that can be used to save
for disability-related expenses. Here are the key features of ABLE accounts:
• ABLE accounts can be created by eligible individuals
to support themselves, by families to support their dependents, or by guardians
for the benefit of their wards.
• Eligible individuals must be blind or disabled - and
must have become so before turning 26 - and must be entitled to benefits under
the Supplemental Security Income (SSI) or Social Security Disability Insurance
(SSDI) programs. Alternatively, an individual can become eligible if a
disability certificate for the individual is filed with IRS.
• ABLE accounts are established under state ABLE
programs. An account may be opened under any state's program (where that state
allows out-of-state participants), not just the program of the state where the
eligible individual lives. A majority of states have passed legislation to
sponsor ABLE programs. Some states that haven't established their own programs
allow tax benefits for contributions to a program in another state.
• Any person may contribute to an ABLE account. While
contributions aren't tax-deductible, the funds in the account are invested and
grow free of tax. The account's investment directions can be changed up to
twice a year.
• Distributions from an ABLE account are tax free if
used to pay for expenses that maintain or improve the designated beneficiary's
health, independence, or quality of life. These expenses include education;
housing; transportation; employment support; health, prevention, and wellness
costs; assistive technology and personal support services; and other
IRS-approved expenses.
• If distributions are used for nonqualified expenses,
the portion of the distribution that represents earnings on the account is
subject to income tax plus a 10% penalty tax.
• An eligible individual can have only one ABLE
account. The total annual contributions by all persons to that account can't
exceed the gift tax exclusion amount ($15,000 for 2018, adjusted annually for
inflation). But for tax years beginning after Dec. 22, 2017, for contributions
made before 2026, the designated beneficiary can make additional contributions,
in excess of this limit, up to the lesser of the federal one-person poverty
line or the beneficiary's compensation. To be eligible to make these
contributions, the designated beneficiary must be employed or self-employed and
must not be covered by an employer's retirement saving plan.
• There is also a limit on the total balance in the
account. This limit, which varies from state to state, is equal to the limit
imposed by that state on qualified tuition plans (Section 529 college savings
accounts).
• ABLE accounts can generally be rolled over only into
another ABLE account for the same individual or into an ABLE account for a
sibling who is also an eligible individual. But for distributions after Dec.
22, 2017, for transfers made before 2026, amounts from qualified tuition
programs (529 accounts) are allowed to be rolled over to an ABLE account
without penalty, provided that the ABLE account is owned by the designated
beneficiary of that 529 account, or a member of that designated beneficiary's
family. These rolled-over amounts are counted towards the overall limitation on
amounts that can be contributed to an ABLE account within a tax year, and any
amount rolled over in excess of this limitation is includible in the gross
income of the distributee.
• ABLE accounts have no impact on an individual's
Medicaid eligibility. However, ABLE account balances in excess of $100,000 are
counted toward the SSI program's $2,000 individual resource limit. Thus, an
individual's SSI benefits are suspended, but not terminated, when his or her
ABLE account balance exceeds $102,000 (assuming the individual has no other
assets). In addition, distributions from an ABLE account to pay housing
expenses count toward the SSI income limit.
• If an eligible individual dies, any amount remaining
in the account after Medicaid reimbursements goes to the deceased's estate or
to a beneficiary and will be subject to income tax on investment earnings, but
not to a penalty.
• For tax years beginning after Dec. 22, 2017, for
contributions made before 2026, the designated beneficiary of an ABLE account
can claim the saver's credit for contributions made to his or her ABLE account.
We hope this information is helpful. If you'd like more details
about establishing an ABLE account, please don't hesitate to contact us.
