The tax laws
have long encouraged Americans to save for college for their kids and to save
for their retirement, but for families of those with disabilities, there was no
tax-advantaged way for them to save for those individuals. The recently enacted
Tax Increase Prevention Act of 2014 contains an important new provision which
changes that.
The new law,
which applies for tax years beginning after December 31, 2014, allows for the
creation of "Achieving a Better Life Experience" (ABLE) accounts,
which are tax-free accounts that can be used to save for disability-related
expenses. Here are the key features of ABLE accounts:
... ABLE accounts can be created by individuals to support
themselves or by families to support their dependents.
... There is no federal taxation on funds held in an ABLE
account. Assets can be accumulated, invested, grown and distributed free from
federal taxes. Contributions to the accounts are made on an after-tax basis
(i.e., contributions aren't deductible), but assets in the account grow tax
free and are protected from tax as long as they are used to pay qualified
expenses.
... No federal tax benefits are provided for those who contribute
to an ABLE account.
... Money in an ABLE account can be withdrawn tax free if the
money is used for disability-related expenses. Expenses qualify as disability
related if they are for the benefit of an individual with a disability and are
related to the disability. They include education; housing; transportation;
employment support; health, prevention, and wellness costs; assistive
technology and personal support services; and other expenses.
... Distributions used for nonqualified expenses are subject to
income tax on the portion of such distributions attributable to earnings from
the account, plus a 10% penalty on that portion.
... Each disabled person is limited to one ABLE account, and
total annual contributions by all individuals to any one ABLE account can be
made up to the gift tax exclusion amount ($14,000 in 2014, which is adjusted
annually for inflation). Aggregate contributions are subject to the State limit
for education-related Section 529 accounts.
... ABLE accounts can generally be rolled over only into another
ABLE account for the same individual or into an ABLE account for a sibling who
is also an eligible individual.
... Eligible individuals must be blind or severely disabled, and
must have become so before turning 26, based on marked and severe functional
limitation or receipt of benefits under the Supplemental Security Income (SSI)
or Social Security Disability Insurance (DI) programs. An individual doesn't
need to receive SSI or DI to open or maintain an ABLE account, nor does the
ownership of an account confer eligibility for those programs.
... ABLE accounts have no impact on Medicaid, but, in certain
cases, SSI payments are suspended while a beneficiary maintains excess
resources in an ABLE account. More specifically, the first $100,000 in ABLE
account balances is exempted from being counted toward the SSI program's $2,000
individual resource limit. However, account distributions for housing expenses
are counted as income for SSI purposes. Assuming the individual has no other
assets, if the balance of an individual's ABLE account exceeds $102,000, the
individual is suspended, but not terminated, from eligibility for SSI benefits
but remains eligible for Medicaid.
... Upon the death of an eligible individual, any amounts
remaining in the account (after Medicaid reimbursements) will go to the
deceased's estate or to a designated beneficiary and will be subject to income
tax on investment earnings, but not to a penalty.
... Contributions to an ABLE account by a parent or grandparent
of a designated beneficiary are protected in bankruptcy. In order to be
protected, ABLE account contributions must be made more than 365 days prior to
the bankruptcy filing.
