ABLE accounts for disabled beneficiares are a powerful tool which can be used to help manage the finances for a disabled 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.
Supplemental Security Income
Often a disabled person will be eligible for Supplemental Security Income (SSI) and other related services. However, if the disabled person has assets over $2,000 they risk being denied these much needed support and services. That’s where ABLE accounts for disabled beneficiares come into play. Eligibility for SSI looks at a disabled person’s resources to determine eligibility. 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. This 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.
The contribution limits for ABLE accounts and rules around ABLE accounts are determined by IRS Codes. More information can be found on the IRS website. The rules for ABLE accounts for disabled beneficiares were recently updated and clarified. The updated regulations provide guidance on the gift and generation-skipping transfer tax consequences of contributions to an ABLE account, as well as on the federal income, gift, and estate tax consequences of distributions from, and changes in the designated beneficiary of, an ABLE account.
Tax Cuts and Jobs Act of 2017
The benefits of ABLE accounts were enhanced by the Tax Cuts and Jobs Act of 2017. However, it’s important to note that most of the provisions of the Tax Cuts and Jobs Act of 2017 are set to expire on 12/31/2025.
Contribution Limits for ABLE Accounts
ABLE account contributions are limited to the annual gift tax exclusion amount, which is $15,000 for 2019, 2020 and 2021. The Tax Cuts and Jobs Act of 2017 (TCJA) made significant changes to ABLE accounts. TCJA allows for higher annual contributions to an ABLE account in certain circumstances discussed below.
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.
Higher Contribution Limits if Employed
TCJA 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. Even if the state allows above $100,000 held in an ABLE account, any amount in the accout above $100,000 may jeapordize the beneficiary’s SSI eligibility.
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, 2020 and 2021. The total annual contribution to the ABLE account cannot exceed $15,000 for 2019, 2020 and 2021, 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, the fact that changes in the tax law due to TCJA are current set to expire on December 31, 2025 may effect your planning. Hopefully the changes to the ABLE accounts will be made permanent at a later date.
As always, if you would like more information on this topic, please contact me.
Disclaimer: This article is provided for general information and illustrations purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult with a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Tricia Rosen, and all rights are reserved. Read the full disclaimer.