www.taxprofessionals.com - TaxProfessionals.com
Posted by Richard Holbrook, MBA

What You Need to Know About ABLE Accounts

What You Need to Know About ABLE Accounts

When it comes to saving for the future of a disabled child or family member, family can often be limited in their options. However, the government has created a savings account that can be used in these situations, known as the Achieving a Better Life Experience Act (ABLE). These saving accounts give family members a chance to make tax-free contributions or gifts for someone blind or otherwise disabled. Additionally, the interest income is also tax-free. Working with a tax professional or accountant, such as Baystate Tax Service, you can determine if an ABLE account will fit your long-term financial savings goals.

When distributions are taken, they are tax-free and can be used to a variety of living expenses, including housing, transportation, and job training. An added bonus is that these accounts are not included in mean-tested government programs to determine an individual’s eligibility. Once an ABLE account reached $100,000, certain federal benefits could be temporarily suspended, but they can be reinstated at a later date.

State Regulations for ABLE Accounts

Keep in mind that much of the information available is based on the Federal Act, but these accounts are actually regulated by the states. Therefore, each state may apply different regulations and varying tax benefits, similar to the limits set on college accounts.

So Who Can Qualify?

If your child is currently receiving SSI or SSDI benefits, then they might be eligible to benefit from an ABLE account. Otherwise, an individual who is blind or has a physical and mental impairment results in functional limitations for over a year. Individuals suffering with a chronic lifetime disability would also qualify. Keep in mind that depending on your state, you may need to furnish documentation of your child’s diagnosis or an affidavit stating the diagnosis and any functional limitations.

While there is no specific age requirement for the account to be set up, the individual must have become have incurred their disability prior to their 26th birthday. Older taxpayers who are disabled in their retirement would not qualify.

Qualified Expenses Under the ABLE Act

With the ABLE account, numerous expenses can qualify for tax-free withdrawals during the existence of the ABLE account. These expenses can be related to health care, employment, education and housing. However, the state regulations may factor in here, depending on the state you live in. Here are just a few examples of potentially qualified expenses:

  • Premiums for health care insurance
  • Mental health, medical, vision and dental expenses
  • Durable medical or adaptive equipment
  • Long-term services and supports
  • Expenses relating to obtaining and maintaining employment, such as transportation
  • Personal assistance supports
  • Educational expenses, including job training
  • Rent or mortgage payments on a primary residence
  • Home improvements or specialized modifications to adapt the residence
  • Property taxes
  • Moving expenses
  • Books/Supplies for educational opportunities
  • Tutors or Special Education services
  • Financial management and account administration services

However, you need to check with your accountant or tax professional to determine the eligible expenses for your state.

Impact on Federal Benefits

As we have mentioned, the mean-tested federal benefits would not include the ABLE account as income to determine eligibility. However, once the ABLE account reaches $100,000, SSI benefits would be suspended while the account remained at this higher level. Medicaid benefits would not be suspended during the same time period.

Another point to keep in mind is that if the beneficiary passes away, then the account’s funds must be paid to Medicaid depending on how much they used in benefits. The amount of payback will be calculated on Medicaid’s expenses in behalf of the dependent, but it will only apply to expenses incurred after the ABLE account was started.

Benefits of an ABLE Account

College savings accounts, referred to 529 accounts, are what the ABLE accounts are modeled after. Here are just a few of the benefits of using these tax-savings accounts:

  • Income earned on the account is not taxed and contributions are tax-free gifts up to $14,000
  • Withdrawals for eligible expenses are tax-free
  • No maximum or minimum of contributions
  • States may be able to apply maximum limits on total annual contributions
  • Each parent can contribute up to $14,000 tax-free annually

For those with disabled dependents, this account creates a nest egg for their future. However, parents and family members should be sure to check with their tax professionals or accountant prior to setting it up to be sure that you are maximizing your tax benefits.

Call or click below to get in contact with one of the tax professionals or accountants at Baystate Tax Service, to explore how an ABLE account could benefit your family.

Richard Holbrook, MBA
Contact Member