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Savings is a challenging part of everyone’s life. But an even more challenging task is faced by those trying to set funds aside for a family member with disabilities.
One tax-favored savings account created in 2014 to assist disabled individuals is the Achieve a Better Living Experience (ABLE) program. Although many people are familiar with the basic issues of establishing and contributing to an ABLE account, there are several attractive advantages for the beneficiary of the ABLE account that are underappreciated. Moreover, the 2017 tax law has created additional ways to put money in an ABLE account.
The basics
An individual can contribute after-tax dollars up to the annual gift exclusion amount ($15,000 for 2018) into an ABLE account for a qualified designated beneficiary. An eligible beneficiary is a person who is blind or disabled, and the onset of the disability or blindness began before age 26.
Blindness is defined as one that satisfies Title II of the Social Security Act, and meeting the definition for disabled requires that a disability certificate is on file with the IRS for the current tax year. For more details on these qualifications, check out Treasury Regulations 1.529A-2.
The money in an ABLE account can grow tax-free and can be withdrawn tax-free if it is used for a broadly defined list of qualified disability expenses. For example, qualifying expenses not only cover education, housing, transportation and employment training but also financial management and legal fees. Even a smart phone can qualify because the disabled person could then communicate and navigate more safely.
However, if some money in an ABLE account is used for non-qualifying disability expenses, those funds are taxed under a complicated formula to determine what part of the withdrawal is earnings and, unless the beneficiary has died, are also subject to a 10% penalty.
What to watch for
• Income received by a disabled person can reduce the amount of benefits coming from sources such as Supplemental Security Income (SSI), Medicaid and the Supplement Nutrition Assistance Program (SNAP), to name a few. However, money taken from an ABLE account with total assets below $100,000 aren’t treated as income that could reduce federal and state assistance.
To avoid this potential pitfall, it is wise to keep the balance on an ABLE account under $100,000. Remember, a designated beneficiary can only have a single ABLE account.
• The Tax Cuts and Jobs Acts of 2017 makes three temporary changes to the ABLE rules. One is an increase in contribution amounts through 2025. If the designated beneficiary has earned income, he or she may contribute an additional amount over the $15,000 annual limit up to the lesser of the federal poverty line for a one-person household or the individual’s compensation for the taxable year.
For 2018 contributions, the poverty line is $12,140 in the 48 contiguous United States and Washington, D.C., $13,960 in Hawaii and $15,180 in Alaska.
In addition, the designated beneficiary can claim the saver’s credit on the increased contribution made by them during the temporary period. The maximum credit amount is $1,000, depending on a person’s adjusted gross income, or AGI, and tax-filing status.
Another temporary change is the ability to transfer money from a tax-favored account for a qualified tuition program (also known as a 529 account) to an ABLE account tax-free and without penalty. The ABLE account must be owned by the designated beneficiary of the 529 account or a family member. However, the rolled-over amounts count toward the annual contribution limit ($15,000 for 2018), which means any amount over $15,000 transferred from the 529 account becomes partially taxable to the 529 account owner.
Again, the taxable part is a complicated calculation, which suggests it is best not to overcontribute to the ABLE account in any year.
Finally, it should go without saying that this is a complex area. Consult a qualified tax adviser be consulted before establishing or investing in an ABLE account, and even more importantly, before transferring from a 529 account or making a disability expense distribution.
Anthony P. Curatola is the Joseph F. Ford Professor of Accounting at Drexel University’s LeBow College of Business and editor of the Taxes column for “Strategic Finance”.