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ABLE Accounts and Your Taxes – What You Need to Know

ABLE Accounts and Your Taxes – What You Need to Know

In 2014, the Achieving a Better Life Experience, or ABLE, Act was signed into law after passing through the House and Congress. The act allowed people with disabilities to establish a tax-free savings account to help manage some of the expense associated with being disabled. This can include anything from housing and transportation to employment training and assistive technology.

This type of savings account isn’t anything new – it’s modelled on the rules for other dedicated accounts such as college savings or a Health Savings Account. With the introduction of the ABLE Act, many families have wondered if it’s something they can use and, if so, what the effects could be on their yearly tax bill. We at Williams  Tax & Bookkeeping can help you shed some light on these issues and would be happy to welcome you in our office or help you via phone.

First, of course, you need to know whether or not you or your family qualifies to use an ABLE Account. In order to be eligible for the ABLE Act, the person must be

  • Someone who is eligible for benefits under the Supplemental Security Income (SSI) program or the Social Security disability, retirement, and survivors program
  • Under the age of 26 or have been younger than 26 when they became disabled
  • Able to provide documentation proving their specific disability

If the person meets this criteria, he or she can open a bank account where they can save money tax-free in order to manage expenses related to their disability. Using this kind of account does not affect their Medicare, Medicaid, Social Security or any other benefits nor does it affect their private insurance, if they are already on a plan.

Currently, the rules regarding ABLE Accounts are pretty straightforward. For the 2015 tax year, a person can deposit up to $14,000 in the account without being taxed. The disabled person qualifying for the account can only be associated with one ABLE account, though.

The money you contribute to an ABLE account isn’t tax deductible. Any investment earnings directed to the account would be tax-free provided the money withdrawn is used for specific medical related expenses. There’s a wide range of expenses that qualify, including

  • Any approved medical treatment
  • Education – both furthering a person’s education or specific job training
  • Transportation needs
  • Assistive technology
  • Housing

 

There are other expenses which are covered under the ABLE Act. It’s important to understand which expenses are covered and which are not. Although the IRS allows for a wide range of expenses, they also monitor these accounts for any unauthorized use. This is done as part of a family’s yearly tax review. If any money from the ABLE account is used for expenses not approved as a part of the ABLE Act, the person responsible for the account will be required to pay tax on any portion that involved investment income as well as a 10% penalty.

There are other tax benefits to using an ABLE Account. The first $100,000 in an ABLE Account is not counted towards a taxpayer’s personal assets. This not only has an impact on a person’s tax return each year, it can also be a windfall for parents, families and disabled people who are simply planning ahead. Previously, there had been rules in place that prevented people from getting other forms of assistance if they had more than $2,000 in personal assets. The regulations set up through ABLE accounts, however, help to mitigate this issue.

The best way to evaluate how this type of account may affect your taxes is to find a tax professional for ABLE Accounts. This type of professional accountant or tax preparer will help you to understand the regulations on spending as well as the tax benefits. In order to find a tax preparer that can help, you’ll need to reach out locally and have the documentation required by law. That way, the accountant or tax preparer you choose will be able to move quickly to determine eligibility and help you establish the account.

Working with a professional will allow you to establish the account and determine how best to contribute to it. You can also review which specific expenses will be covered as they relate to your family’s specific situation. For some families this may include present education while, for others, it may be what allows a person to finally be able to pursue further education or vocational training. The flexibility of an ABLE account makes it a true game changer for many disabled people and their families.

At the end of the year, you’ll need to include these expenses when reviewing your finances for your tax return. This will require you keep a list of expenses you’ve paid from the ABLE account. Usually this simply means holding onto receipts and invoices for any money spent so that they can be verified. You may also need to track the money that was paid into the account, particularly if any came from investment income.

This may seem like a daunting bookkeeping task, but help is at hand. If you’re in the Benton area and you need some help from a tax preparer to figure out which deduction option is best for you, give us a call at Williams  Tax & Bookkeeping. We are able to navigate your way through the process and help you once tax time rolls around. Taking advantage of the program can help many families, so learn about your options – and the benefits it can offer – today.

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