Sometimes the good guys in Congress win and get one for the underdog.
Alongside the tax extenders legislation, was another bill passed by Congress and expected to be signed by the President this week. The Achieving a Better Life Experience Act of 2014, establishes “ABLE” accounts for disabled persons.
These are accounts for disabled persons to allow them to have funds to help with their disability related expenses in a tax advantaged manner and without affecting their eligibility for SSI or Medicaid. They function much like Special Needs Trusts (SNT) or Pooled Income Trusts which are currently being used.
Generally, you can’t have any assets if you are on SSI or Medicaid. The ABLE account provides additional funds to help with the extra significant costs of disability. So individuals and families will be able to establish ABLE accounts that will not affect their eligibility for Medicaid, SSI or other public benefits.
These accounts function like a Sec. 529 Qualified College Tuition Plan. In essence, you put after tax money into it and the earnings are never taxed as long as they are used for expenses helping a person with a disability.
In order to qualify for an account, the individual must be entitled to benefits based on blindness or disability under the Social Security disability insurance program or provide a disability certification to the IRS for the tax year in question. The disability must have occurred earlier than age 26. ABLE accounts will not reduce SSI, Medicaid, or other public benefits.
Only Cash can be contributed to an ABLE account. Contributions are not deductible for income tax purposes. However, the income is tax-free when used for qualified disability expenditures. The annual limit on contributions by anyone for one person is the amount of the annual gift tax exclusion which is $14,000 for 2015. Only one account per disabled person is permitted. There are some limitations on SSI if the account gets over $100K.
When funds are distributed from the ABLE account for qualified disability expenses, the money is not subject to taxation. Qualified disability expenses include:
• 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 approved by the IRS.
If distributions exceed the qualified disability expenses, the excess will be taxable and incur a 10% penalty. When the disabled person dies, any remainder would go the deceased’s estate or to a beneficiary, subject to income tax on the investment earnings but no penalty.
People are already using a Special Needs Trust (SNT) or Pooled Income Trust to provide additional funds to help with the extra costs of disability similar to an ABLE account. The ABLE account has two advantages. It is tax favored and it is less expensive to set up. Determining which option is the most appropriate will depend upon individual circumstances. For many families, the ABLE account will be a significant and viable option in addition to, rather than instead of, a Trust program.