ABLE accounts can provide value for clients with disabilities

Living with a disability can come with additional expenses, as your clients with disabilities will already tell you. Achieving a Better Life Experience (ABLE) accounts are used to help pay for qualified disability-related expenses but must meet the requirements of §529A. The Achieving a Better Life Experience Act (ABLE Act) allows states to create ABLE programs. ABLE accounts can be established in any state, not just the state of residency.

Here are some key things people should know about these accounts to help you better meet the needs of your clients in the 2021 tax season:

Account eligibility

ABLE accounts may be established for those whose blindness or disability occurred before age 26. To be eligible for an ABLE account, either of the following can apply:

• You are entitled to benefits based on blindness or disability under Title II or XVI of the Social Security Act.
• You file a disability certification under the rules of your qualified ABLE program, which will include information regarding your diagnosis relating to your relevant impairment or impairments signed by a licensed physician.
  • You must certify one of the following:
    • You have a medically determinable physical or mental impairment which results in marked and severe functional limitations, which (a) can be expected to result in death, or (b) lasted or can be expected to last for a continuous period of not less than 12 months.
    • You are blind within the meaning of section 1614(a) (2) of the Social Security Act and the disability or blindness occurred before the date the individual reached age 26.

Annual contribution limit

The limit remains $15,000 in 2020 and 2021 (annual contributions are limited to the value of the gift tax exclusion) and excess contributions are subject to a 6% excise tax if a corrective distribution of the excess contribution is not made within the tax year. For tax years 2018-2025, once the overall contribution limit is reached ($15,000 for 2020), certain employed ABLE account beneficiaries may make an additional contribution up to the lesser of these amounts:

• The designated beneficiary’s compensation for the tax year; or
• The federal poverty line for a one-person household for the prior year. For 2020 contributions, the poverty line for a one-person household is $12,490 in the continental U.S., $15,600 in Alaska and $14,380 in Hawaii.

Saver’s credit

ABLE account designated beneficiaries may now be eligible to claim the saver’s credit for a percentage of their contributions. The beneficiary claims the credit on Form 8880, Credit for Qualified Retirement Savings Contributions. The maximum savers credit is $1,000 ($2,000 contribution x 50% credit percentage) and an eligible lower-income taxpayer can claim up to $2,000 of retirement savings contributions. The saver’s credit is a non-refundable credit available to individuals who meet these three requirements:

• Are at least 18 years old at the close of the taxable year
• Are not a dependent or full-time student
• Meet the income requirements

Rollovers and transfers from Section 529 plans

Families may now roll over funds from a 529 plan to another family member’s ABLE account. The ABLE account must be for the same beneficiary as the 529 account or for a member of the same family as the 529 account holder. Rollovers from a section 529 plan count toward the annual contribution limit.

For example, the $15,000 annual contribution limit would be met by parents contributing $10,000 to their child’s ABLE account and rolling over $5,000 from a 529 plan to the same ABLE account.

Qualified disability expenses

States can offer ABLE accounts to help people who become disabled before age 26 or their families pay for disability-related expenses. Qualified expenses can include education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness services, financial management and administrative services, legal fees, expenses for oversight and monitoring, and funeral and burial expenses.

Though contributions aren’t deductible for federal tax purposes, distributions, including earnings, are tax-free to the beneficiary, as long as they are used to pay qualified disability expenses.