The Internal Revenue Service (IRS) has issued final regulations covering tax-free savings accounts that allow people with disabilities and their families to save and pay for disability-related expenses without jeopardizing eligibility for Medicaid, Supplemental Security Income (SSI) and other government benefits.
Passed by Congress in December 2014, the Achieving a Better Life Experience (ABLE) Act allows families to set aside up to $15,000 annually (up to $100,00 in total) in so-called ABLE accounts. The accounts function much like Section 529 college savings accounts, except that rather than paying for educational expenses, money in ABLE accounts is to be used for a wide range of “qualified disability expenses.” And, unlike a special needs trust, an ABLE account can be managed and controlled by the beneficiary.
The IRS first issued proposed regulations for the ABLE Act in 2015, and then published revised regulations in October 2019 following passage of the Tax Cuts and Jobs Act (TCJA) in December 2017.
The final regulations contain no major surprises. They incorporate most provisions in the earlier sets of regulations while clarifying certain other provisions. As provided in the revised regulations, families may roll over money from 529 accounts into ABLE accounts. Account holders who are working may contribute their own money from their incomes above the $15,000 annual cap, up to the federal poverty limit. The $15,000 cap is tied to the annual gift tax exclusion, which will rise in coming years. And certain low- and middle-income account holders may be eligible for a tax credit, known as the Saver’s Credit, for the first $2,000 in contributions ($4,000 for couples) to an ABLE account each year.
The final regulations, which total 174 pages, also further clarify numerous other provisions of the ABLE Act. For example, the regulations provide that an ABLE account may be set up by the beneficiary, by the beneficiary’s agent under a power of attorney, by certain family members, or by representative payees appointed by the Social Security Administration. The person creating the account is responsible for certifying that the beneficiary is a qualifying person with a disability for the purposes of coverage under the ABLE Act.
The final regulations also preserve the broad definition of “qualified disability expenses,” referring to the type of expenses that funds in ABLE accounts can pay for. ABLE accounts can be used for a wide range of expenses, including food, housing, assistive technology, transportation, and educational services.
Click here to read the full final regulations, which generally take effect January 1, 2021.
Click here for a directory of state ABLE accounts.
For more on ABLE accounts, click here, here, and here.
Like millions of other Americans, recipients of Medicaid and Supplemental Security Income (SSI) have received or should soon receive a one-time $1,200 coronavirus relief payments from the federal government. And, if Congress can come to an agreement, a second round of economic impact payments will be coming. (If you haven’t received your payment and did not file a 2019 tax return, click here to access the IRS’s page for non-filers.)
Although this money does not immediately affect eligibility for means-tested programs like Medicaid and SSI, if the money is not spent within 12 months it will count as an asset and could affect eligibility.
One solution is to put the funds in an Achieving a Better Life Experience (ABLE) account, where it can remain without affecting eligibility for programs like Medicaid and SSI. Authorized by Congress in 2014, ABLE accounts are a tax-advantaged way to put money aside for dependents with disabilities. Funds in the accounts can be spent on a wide range of disability-related expenses without compromising eligibility for government benefits. Unlike a special needs trust, an ABLE account can be managed and controlled by the beneficiary.
Not everyone with a disability can qualify for an ABLE account, however. Eligibility is limited to people who developed their disability before age 26. Also, total contributions to ABLE accounts are limited to $15,000 per year, although beneficiaries who work can make ABLE contributions above the $15,000 annual cap from their own income up to the Federal Poverty Level. If the value of the account exceeds $100,000, any SSI income is suspended until the account dips below that limit. These savings plans may be used for a broad array of products and services related to the eligible individual’s disability.
For help opening or investing in an ABLE account, please give us a call.
ABLE accounts, new tax-free saving accounts for people with disabilities, hold great promise for special needs planning. But among the many questions surrounding ABLE plans is who can open accounts? Only the person with a disability? Parents? Other relatives? Friends?
Created by Congress via the passage of the Achieving a Better Life Experience (ABLE) Act in 2014 and modeled after popular 529 college savings accounts, ABLE accounts allow people with disabilities to save for disability-related expenses while maintaining eligibility for Supplemental Security Income, Medicaid and other government benefits. People can save up to $15,000 annually, up to a maximum $100,000. Nearly every state in the country has passed legislation enabling people with disabilities and their families to open these new savings accounts.
So who is allowed to actually open an account? ABLE accounts can be set up either by the account beneficiary (the person with disabilities), or that person’s parent, legal guardian or another person with power of attorney.
If beneficiaries set up the accounts, however, they must not be a minor, meaning they are age 18 or older, and not have cognitive disabilities that would prevent them from being able to do so.
One limitation on ABLE accounts, however, is the ABLE Act’s strict definition of a qualifying disability. In order to be the beneficiary of an ABLE account, the person’s disability must have begun prior to the age of 26. This excludes many people with disabilities that formed later in life, such as many individuals with chronic conditions or disabilities resulting from car crashes or other incidents. The ABLE Age Adjustment Act, currently before both houses of Congress, would raise the onset-of-disability age from 26 to 46.
If you want to set up or contribute to an ABLE account for yourself or a loved one, contact us today.
Under the federal tax code, certain low- and middle-income workers are eligible for a tax credit, known as the Saver’s Credit, designed to reward them for contributing to their retirement plans.
The new tax law, the Tax Cuts and Jobs Act, provides that people will now be able to benefit from the credit when they contribute to ABLE accounts for people with special needs.
Congress passed the Achieving a Better Life Experience (ABLE) Act in 2014, creating a new savings vehicle for people with disabilities that preserves their eligibility for Medicaid, food stamps, and other means-tested programs while saving for disability related expenses.
Annual contributions to ABLE accounts are capped at $15,000. Of these contributions, a certain portion of the first $2,000 -- $4,000 if the person is married and filing joint taxes -- can be deducted via the Saver’s Credit, depending on the contributor’s income.
With the Saver’s Credit, people can receive a credit equivalent to 50, 20, or 10 percent of their annual contributions to Individual Retirement Accounts (IRAs), including both traditional or Roth IRAs, or employer-sponsored retirement plans -- and now ABLE accounts as well -- up to $2,000.
For 2018, individuals with adjusted gross incomes of less than $28,500, filing as the head of household, can receive a credit for 50 percent of their contributions. So, for example, if a person making $25,000 in adjusted gross income contributes $2,000 toward an ABLE account, she can receive a $1,000 credit on her tax return by claiming the Saver’s Credit. This figure drops to 20 percent if the person’s adjusted gross income is between $28,601 and $30,750, then to 10 percent if the person earns between $30,751 and $47,250. (All income figures are for 2018.) The credit is not available to people making an income above these amounts.
Anyone contributing to an ABLE account could potentially be eligible for the credit, although it is not available to people under age 18 or full-time students, as well as people who are listed as dependents on another person’s tax return.
The Saver’s Credit can be claimed by filling out IRS Form 8880, Credit for Qualified Retirement Savings Contributions. This form will be revised later in 2018 to reflect the new changes.
For more about ABLE accounts, contact us.
In passing the Achieving a Better Life Experience (ABLE) Act in 2014, Congress created a new way for potentially millions of people with special needs to save for disability related expenses without jeopardizing their eligibility for federal public benefit programs.
In fact, these savings plans, popularly known as ABLE accounts, may be used for an even broader array of products and services than many beneficiaries may realize – including housing expenses, bus fare, financial management services or even, potentially, a smart phone.
The ABLE Act itself defines “qualified disability expenses” as “expenses related to the eligible individual’s blindness or disability which are made for the benefit of an eligible individual who is the designated beneficiary.” It then goes on to list a range of categories of potential uses for funds set aside in ABLE accounts, including:
“Education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses, and other expenses, which are approved by the Secretary under regulations and consistent with the purposes of this section.”
In subsequent proposed regulations released in June 2015, the Treasury Department and Internal Revenue Service (IRS) reiterated that the term “qualifying disability expenses” should be “broadly construed” to include any benefit related to the designated beneficiary “in maintaining or improving his or her health, independence, or quality of life.”
This means that there is no requirement that the benefit be medically necessary, such as is the case when determining health care services covered by Medicaid, or that it benefit no one but the designated individual. As an example, the regulations specify that a smart phone could qualify as a covered expenses, provided that it serves as “effective and safe communication or navigation aid for a child with autism.”
Originally, the proposed regulations would have also required states to establish safeguards for ensuring that ABLE funds are only used for qualifying expenses, presumably by requiring beneficiaries to obtain pre-approval before distributing funds. In response to a backlash from disability advocates, many who feared that such requirements would be unduly burdensome, the Treasury Department and IRS rescinded this requirement in a notice issued November 2015 So as things stand now, you don’t need to get approval to withdraw funds and pay for a qualified disability expense.
The Obama administration, however, never issued final regulations, although the IRS has stated that “[u]ntil the issuance of final regulations, taxpayers and qualified ABLE programs may rely on these proposed regulations.”
To protect against future inquiries from the IRS, the ABLE National Resource Center recommends that beneficiaries maintain detailed records of expenses paid for by ABLE account assets, as well as how these expenses relate to their disabilities in case the expenditures are ever questioned by the IRS. Misuse of ABLE account funds could result in tax penalties and possible loss of public benefits.
Click here to watch a video and read a fact sheet about qualifying disability expenses from the ABLE National Resource Center.
For help in setting up an ABLE account or to find out whether something you want to use the account for is a qualified disability expense, please contact us.