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ABLE Accounts: Even more able after tax reform

People with disabilities and their families have gotten some good news with tax reform.

ABLE (Achieving a Better Life Experience) accounts, which are tax-advantaged investment accounts for individuals with disabilities and their families, were created in 2014 to help pay for the costs of living with a disability. Tax law changes have made a good thing better.

To be eligible for ABLE, you must have a significant disability that began before age 26 and currently receive benefits under Social Security Supplemental Security Income (SSI) or Social Security Disability Income SSDI.

Medicaid and SSI normally don't allow recipients to have more than $2,000 in savings. But Medicaid and SSI recipients can have ABLE accounts in excess of the $2,000 limit and still receive public benefits, a key benefit of the accounts. 

If you don’t receive SSI or SSDI, but still meet the age requirement for ABLE, you could still be eligible to create an account if you meet the Social Security Administration’s definition of having significant functional limitations.

“The disability may be self-certified if it is one that is listed in the Social Security Administration’s ‘List of Compassionate Allowances Conditions’ and have a signed qualifying disability diagnosis from a qualified physician. Both physical and mental disabilities may qualify someone for an ABLE account,” says Hal Peterson, a partner at Prager Metis CPAs in Manhattan.

How do they work?

Like many other tax-advantaged plans, funds in them are invested and typically grow tax-free. When an ABLE account withdrawal is made, it must be spent on disability-related expense — such as education, transportation, and employment training — or the withdrawal is taxable. ABLE accounts are generally state-run and you can open one in any state.

Three changes thanks to tax reform

ABLE account taxpayers can now qualify for the Saver's Credit, which is a tax credit, based on the contributions they make into their accounts. You can claim up to $2,000 of your ABLE account contributions made for the year under the Saver’s Credit. To qualify for the Saver's Credit, you must be over 18, not a full-time student and not claimed by anyone as a dependent.

You can transfer funds from a 529 plan — a tax-advantaged account to pay for higher education — to an ABLE account, without paying a penalty for withdrawing funds.

ABLE account beneficiaries who work can make additional contributions to their own ABLE accounts. If you qualify, you can contribute the greater of your compensation or the federal poverty line amount for one-person households, which is $12,140 for the continental U.S. in 2018. There are higher limits for residents of Hawaii and Alaska. This means that if you work, have no employer-sponsored retirement plan and make less than $12,140, you can put all your wages into your ABLE account.

Where are the hiccups?

“No matter where the money comes from, your Saver’s Credit is capped at $2,000. For example, if $1,000 was rolled over from a 529 college savings plan to an ABLE account and an additional $2,000 was contributed to the same ABLE account, only $1,000 would be allowed as a Saver's Credit. This is because the $2,000 contribution made would be reduced by the $1,000 rollover, resulting in the $1,000 Saver's Credit,” explains Christina Taylor, senior manager of tax operations at Credit Karma Tax in San Francisco.

Understand too, about Medicaid payback. Says Manisha Hansraj, a tax expert with Rapid Filing Services in Manhattan, “Depending on where you live, if the beneficiary dies and there are no eligible siblings to transfer the account to, the state could possibly take the ABLE account as repayment of any services provided to the beneficiary.”

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