ABLE accounts are a powerful tool which can be used to help manage the finances for a special needs loved one. ABLE accounts are a tax deferred account with rules similar to a college savings 529 plan, but with some important distinctions. Additionally, an ABLE account will serve a different purpose for a disabled person than a 529 account would serve for a non-disabled person. The ABLE account benefits were enhanced further with the Tax Cuts and Jobs Act of 2017.
ABLE Accounts and Supplemental Security Income
Often a disabled person will be eligible for Supplemental Security Income (SSI) and other related services, but if the disabled person has assets over $2,000 they risk being denied these much needed support and services. Eligibility for SSI looks at a disabled person’s resources to determine eligibility, and once they go over the $2,000 threshold the disabled person will no longer be eligible for SSI. The beneficiary can re-apply if the assets go back below $2,000, but re-applying is a time-intensive process and the beneficiary may have the additional consequence of losing other related supports when they lose SSI eligibilty, therefore it should be avoided if at all possible.
Assets held in an ABLE account do not count as an available resource when determining SSI eligibility, which gives the disabled beneficiary an option to be able to accumulate more than $2,000 without losing SSI eligibility. The ABLE account beneficiary can use the ABLE account to save money for larger expenses in the future, or to be able to make the accounting for their expenses simplier.
Tax Cuts and Jobs Act of 2017 and Contribution Limits
The contribution limits for ABLE accounts and rules around ABLE accounts are determined by IRS Codes. ABLE account contributions are limited to the annual gift tax exclusion amount of $15,000 for 2019 and 2020. The Tax Cuts and Jobs Act of 2017 (TCJA) made significant changes to ABLE accounts, however it’s important to keep in mind the provisions of TCJA are only effective through 12/31/2025 at this time. TCJA allows for higher annual contributions to an ABLE account in certain circumstances.
If there is a contribution rolled over from a family member’s 529 account, it is included in the $15,000 annual contribution limit. However, assets received in rollovers and/or program-to-program transfers between ABLE accounts is not included in the $15,000 annual contribution limit.
TCJA also allows for a higher annual contribution to an ABLE account if the designated beneficiary is employed and has earned income. The additional contribution amount limitation is up to the lesser of the designated beneficiary’s compensation for the tax year, or the poverty line amount of $12,140 in the continental United States, $13,960 in Hawaii and $15,180 in Alaska. The designated beneficiary’s contribution limit is determined using the poverty guideline applicable in the state of the designated beneficiary’s residence. The designated beneficiary of the account must be an employee, but can be self-employed. However, an employed designated beneficiary isn’t eligible for the increased contribution limit for the tax year if any contribution is made on behalf of the employee to a qualified defined contribution plan within the meaning of IRS Code section 414(i)), a section 403(b) plan, or a section 457(b) plan. The IRS Code Section 414(i) defines a defined contribution plan as a plan which provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant’s account. Examples would be a 401(k), SEP IRA or other retirement account where the employee has a separate account into which they make contributions and the amount received at retirement is based on employee contribution amounts and market performance. Defined benefit plans would not disqualify the employed designated beneficiary from the increased ABLE account contribution limits available due to earned income. In addition, ABLE account contributions may not exceed a cumulative limit, which is the same as the state’s section 529 qualified tuition program cumulative limit, generally $100,000.
TCJA and Saver’s Credit
An additional benefit of the TCJA for ABLE acounts is the Saver’s Credit which allows the designated beneficiary of an ABLE account to take a credit of up to $1,000 for contributions of earned income made to the ABLE account. However, the credit is non-refundable so it will only be useful to an ABLE designated beneficiary with a tax liability. If the designated beneficiary does not owe any taxes, the credit cannot be used. A tax credit is a valuable tax benefit because it reduces the taxpayer’s tax liability dollar for dollar, as opposed to a tax deduction which only reduces the taxpayer’s taxable income used to calculate the tax liability.
More TCJA Information
Funds from a 529 account can now be rolled over into an ABLE account. The rollover amount is subject to the annual gift tax exclusion amount which is $15,000 for 2019 and 2020. The total annual contribution to the ABLE account cannot exceed $15,000 for 2019 and 2020, including any funds rolled over from a 529 account. The only exception to the $15,000 annual contribution limit is if the disabled beneficiary also has earned income. The funds being rolled over from a 529 can come from both the ABLE account designated beneficiary as well as family members with 529 accounts.
While these enhancements to the ABLE accounts make them more beneficial, it is worth noting that the changes in the tax law due to TCJA are current set to expire on December 31, 2025. Hopefully the changes to the ABLE accounts will be made permanent at a later date.
If you have any questions related to ABLE accounts please contact us at firstname.lastname@example.org
Provided for general education and informational purposes only. May 2020 © Access Financial Planning, LLC