New tax-saving opportunities for certain individuals with disabilities
Last December, President Obama signed the Stephen Beck, Jr., Achieving a Better Life Experience (ABLE) Act into law. The enactment of ABLE resulted from an eight-year campaign to gain approval for tax-free savings accounts to help individuals and families finance disability needs.
The ABLE Act mirrors the provision of a §529 plan (an account used to fund education) and can help families fund an account to ease the expensive burden of caring for someone with disabilities. Each state is responsible for establishing and maintaining an ABLE account. While each state is different and may tweak the logistics, here are some common components of the program:
• Only one ABLE account can be established per individual.
• Earnings grow tax-free.
• Contributions from all family members is limited to $14,000.
• ABLE accounts should generally not be counted for purposes of supplemental social security income, Medicaid or certain other federal programs.
• Funds included in distributions that are not used for qualified expenses are subject to income tax as well as a 10% penalty.
• Earnings are not taxable if used to pay for certain expenses such as housing, transportation, employment training and support, health and wellness, assistive technology and personal support services, legal fees, oversight and monitoring, and funeral and burial costs.
Eligible individuals include those who become disabled before age 26 and either receive Social Security Disability Insurance (SSDI) or SSI, or those who file a disability certification under rules established by their state.
If a state does not establish and maintain its own qualified ABLE program, it may enter into a contract with another state in order to provide its residents with access to a qualified ABLE program.
It’s important to note that, similar to §529 plans, an ABLE account does not give you a tax deduction for federal tax purposes, but the income earned is not taxable.