Achieving a Better Life Experience, or “ABLE”, accounts are tax-advantaged savings accounts for individuals with disabilities and their families. ABLE accounts help persons with disabilities pay qualifying expenses related to their disabilities.
The Tax Cuts and Jobs Act of 2017 did the following:
- Increased the amount of contributions allowed to an ABLE account and added special rules for the increased contribution limit.
- Allows an ABLE account’s designated beneficiary to claim the saver’s credit for contributions to the account.
- Allows rollovers in limited amounts from a 529 qualified tuition program account of the designated beneficiary to the ABLE account of the designated beneficiary or his or her family member.
In general, ABLE accounts can be set up for the benefit of eligible persons with disabilities. To be eligible, the disability should manifest before age 26, and demonstrated by one of the following:
- Entitlement to benefits such as Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) based on blindness or disability, or
- Self-certification of a qualifying disability
If you are eligible to set up an ABLE account, consider the following quick facts:
1. ABLE accounts are used to provide for “qualified disability expenses” of the designated beneficiary and are disregarded for the purposes of determining the eligibility of Supplemental Security Income and other means-tested federal programs.
2. “Qualified disability expenses” include any food, education, housing, healthcare, and other expenses incurred by the eligible individual/designated beneficiary.
3. Contributions are made using post-tax dollars and contributions are not tax-deductible. Contributions can be made by anyone, including the designated beneficiary. Earnings in an ABLE account are not taxable unless a distribution exceeds a designated beneficiary’s qualified disability expenses.
4. Beginning 2018 ABLE account designated beneficiaries may be eligible to claim the “Saver’s Credit” for a percentage of their contributions from wages. The saver’s credit is a non-refundable tax credit that can be claimed by low-income and moderate-income taxpayers for making eligible contributions to their IRA, employer sponsored retirement plan or ABLE account. Depending on the taxpayer’s adjusted gross income reported on the tax return, the credit is 50%, 20% or 10% of the eligible contributions made. The maximum contribution that may qualify for the credit is $2,000 ($4,000 if married filing jointly), making the credit $1,000 ($2,000if married filing jointly.
5. The annual contribution limit to an ABLE account is $15,000 for 2021 (increased to 16,000 in 2022). In addition to the annual limit, a designated beneficiary who is employed may also contribute part of their compensation, up to the poverty line amount for one-person household. A designated beneficiary cannot contribute this additional amount if their employer contributed to their 401(b) defined contribution plan, 403(a) annuity contracts, 403(b) annuity contract, or 457(b) eligible deferred compensation plans.
6. Amounts contributed in excess of annual contribution limits, as well as the earnings on the excess contributions should be returned to the contributors before the due date of the income tax return, generally April 15th. Excess contributions and earning not withdrawn by the due date of filing the tax return will be subject to 6% excise tax.
7. Many states offer qualified individuals several options to establish ABLE account with different investment strategies.
8. Contributions made to an ABLE account for the benefit of a designated beneficiary are exempt from gift tax as you are utilizing the annual gift tax exclusion amount.
9. Rollovers from a section 529 tuition account may be made to a section 529A ABLE account without penalty if the beneficiary of the ABLE account is the designated beneficiary of the section 529 tuition account or is an eligible member of the family. Such rollovers are not subject to tax if distributed funds are contributed to the ABLE account within 60 days after their withdrawal from the section 529 account and the distribution, when added to all other contributions made to the ABLE for the taxable year, does not exceed the annual contribution limit.
Author: Sudha Vishwanath, CPA | [email protected]
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