Congress created Achieving Better Life Experience (ABLE) accounts in 2014. Prior to the creation of the ABLE accounts, individuals with disabilities who were eligible for Medicaid or federal Supplemental Security Income were limited to a maximum of $2,000 in assets, such as bank savings accounts. Now, disabled people are allowed to have up to $100,000 in one of these special accounts without jeopardizing their Medicaid or Supplemental Security Income.
ABLE accounts are available to individuals who became disabled before the age of 26. Once an account is established, anyone can contribute to it, provided that the sum of the contributions for the year does not exceed the annual gift tax exclusion, which is currently $16,000. These accounts are a less-expensive substitute for special needs trusts, which have significant administration costs. If contributions will exceed the annual gifting limit and $100,000 overall, a special needs trust will be required.
Each state must enact its own legislation to make ABLE accounts available in that particular state. As of August, 2022, only four states (Idaho, North Dakota, South Dakota, and Wisconsin) haven’t established ABLE programs. Even so, many states allow nonresidents to participate in their program, while some states only allow their own residents to participate in their ABLE account program.
ABLE accounts are fashioned after qualified state tuition programs, sometimes referred to as Section 529 plans. Although there is no tax benefit associated with contributions to the accounts, the earnings in the accounts accumulate tax-free and are also tax-free if used for qualified expenses such as:
- Health care,
- Employment training and support,
- Assistive technology,
- Personal support services,
- Housing, and
- Transportation expenses.
As a note of caution, qualified expenses do not include food, entertainment or vacations.
Only one account can be established for each beneficiary. The maximum annual contribution to an ABLE account is equal to the annual gift tax exemption amount, which for 2022 is $16,000.
Certain ABLE account beneficiaries who are employed may make an additional contribution to their ABLE account up to the lesser of:
- The account beneficiary’s compensation for the tax year, or
- The poverty line for a one-person household. For 2022, this amount is $12,880 in the continental U.S., $16,090 in Alaska, and $14,820 in Hawaii.
Working ABLE account beneficiaries will only be able to take advantage of making additional contributions to their accounts through 2025.
ABLE accounts are designed so that certain employed ABLE account beneficiaries may be eligible to claim the nonrefundable saver’s credit for a percentage of their contribution. To claim the saver’s credit, an individual must:
- Be at least 18 years old at the end of the tax year
- Not be a dependent or a full-time student, and
- Meet the income requirements.
The saver’s credit is phased out for higher income taxpayers.
Families of a person with a disability may roll over funds from a 529 plan to the individual’s ABLE account. Such rollovers count toward the annual contribution limit. For example, the $16,000 annual contribution limit would be met by parents contributing $10,000 to their child’s ABLE account and rolling over $6,000 from a 529 plan to the same ABLE account.
If you have questions related to ABLE account contributions, the saver’s credit, or rollovers from qualified tuition plans, please give this office a call.