ABLE Accounts for Disabled Individuals

The Tax Increase Prevention Act of 2014 (TIPA) also included another bill, the Achieving a Better Life Experience Act (ABLE) of 2014. ABLE establishes a new type of tax-advantaged account for disabled individuals, allowing them to save money for future needs while remaining eligible for government benefit programs.

Beginning in 2015, TIPA allows states to establish tax-exempt ABLE accounts to assist persons with disabilities in building an account to pay for qualified disability expenses.

Note: Although states can establish ABLE accounts beginning in 2015, it is likely they won't be available until after the IRS provides guidance as to how these accounts should be administered. TIPA requires the IRS to provide this guidance by mid-June 2015.

Contributions to an ABLE account aren't deductible for income tax purposes. However, earnings in the account are deferred until distributed from the account or, if the distributions are used to pay qualified disability expenses, they are tax-free.

Except for Supplemental Security Income (SSI), ABLE accounts are disregarded for federal means-tested programs. Also, some ABLE accounts are provided limited bankruptcy protection.

Eligible individuals. An ABLE account can be set up for an individual (1) who is entitled to benefits under the Social Security disability insurance program or the Supplemental Security Income (SSI) program due to blindness or disability occurring before the individual reached age 26 or (2) for whom a disability certification has been filed with the IRS for the tax year.

Contributions. Annual contributions to an ABLE account are limited to the amount of the annual gift tax exclusion for that tax year ($14,000 for 2015).

Distributions. Distributions from ABLE accounts are tax-free to the extent they don't exceed the designated beneficiary's qualified disability expenses for the year. Distributions that exceed the qualified disability expenses for the year are included in taxable income and are generally subject to a 10% penalty tax.

Distributions can be rolled over tax-free within 60 days to another ABLE account for the benefit of the beneficiary or an eligible individual who's a family member of the beneficiary. Similarly, an ABLE account's beneficiary can be changed, as long as the new beneficiary is an eligible individual who's a family member of the beneficiary.

Death of the beneficiary. At the beneficiary's death, any amounts remaining in the account after Medicaid reimbursements go to the deceased's estate or designated beneficiary. They are subject to income tax on investment earnings, but not to the 10% penalty.

This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. The information contained in this newsletter was not intended or written to be used and cannot be used for the purpose of (1) avoiding tax-related penalties prescribed by the Internal Revenue Code or (2) promoting or marketing any tax-related matter addressed herein. © 2015