By: Margaret M. Stockdale, Attorney at Law
In 2014, the Federal Government enacted a law authorizing states to create “Achieving a Better Life Experience” [ABLE] tax free savings account programs. ABLE accounts give individuals with qualified disabilities (Eligible Individuals), and their families and friends, an opportunity to accumulate tax free savings without losing their eligibility for Medicaid, means tested SSI and other government benefits programs.
In April 2017, the Pennsylvania Department of Treasury began accepting applications for enrollment in the PA ABLE Savings Program. Other states set up similar programs.
In order to be eligible, the disabled individuals’ disability must have occurred prior to him or her reaching the age of 26. While anyone can contribute to an ABLE account, it must be established, and owned, by the disabled individual, or a parent or fiduciary acting on behalf of the eligible individual who is either a minor or lacks capacity.
ABLE account funds may be used for an assortment of “qualified disability expenses.” For example, these funds can be used to pay for health, transportation, education, housing, employment training, legal and financial assistance, and various other things.
Recently, the Tax Cuts and Jobs Act of 2017 (TCJA) changed various aspects of ABLE accounts. This article will update you on those changes.
While qualified individuals have been eligible to create these accounts since 2017, the TCJA has altered the funding rules. Currently, the Internal Revenue Service (IRS) allows a contribution of up to $15,000 a year which may be adjusted based on inflation. Starting in 2018, this limit was able to be exceeded by those eligible individuals who are employed, allowing them to contribute part, or all, of their income to their ABLE account. This amount applies to total contributions and is not a per contributor amount.
One of the most beneficial aspects of ABLE accounts is that a disabled individual can allow their savings to grow, while still receiving benefits, in order to pay for future disability expenses. However, there is an account maximum currently set at $511,758. Once this limit is reached, no additional contributions will be allowed but interest may still be earned.
529 College Career Savings Programs are a tax advantaged way to save for a child’s future education costs. The Pennsylvania 529 program consists of two different investment options to maximize these funds while enjoying a special tax break to encourage savings.
But, at some point parents may realize that higher education is not in the cards for a disabled child. Now, money held in the child’s 529 college savings account may be rolled over to a PA ABLE account. For more information on 529 college savings accounts, please visit https://www.pa529.com/learn/.
Contributions to a PA ABLE Account may be deducted from PA state taxable income with some limits. Additionally, particular contributions made to ABLE accounts may qualify as Saver’s Credit, depending on the designated beneficiary’s income. Of the $15,000 limit, a certain portion of the first $2,000 to $4,000 can be deducted, if the person is married and filing joint taxes, as a Saver’s Credit. However, rollover contributions, those that were moved from one ABLE account to another, do not qualify for the credit. Additionally, these credits may be reduced by any recent distributions. The maximum credit is $2,000 which will either reduce the amount of taxes owed or result in a refund.
ABLE accounts have been an important tool in planning and investing for the future of disabled individuals, who qualify. To understand the basics of the ABLE program and how it has been affected by the most recent tax changes, please visit https://paable.gov/overview/.