It took a long time, but Congress finally did enact the ABLE Act.
Section 529A of the Internal Revenue Code gives a way to fund an account for certain individuals with disabilities. The account is sort of modeled after the Section 529 plans that allow the funds for education expenses in the account to accumulate income (earnings) tax free.
Also, if certain conditions are met, the ABLE account will not disqualify the beneficiary (the disabled person) from receiving Medicaid and Supplemental Security Income (SSI) welfare benefits.
To be eligible for an ABLE account, the onset of the individual’s disability must have occurred before age 26.
Each calendar year either the person with disabilities, or another person, can contribute up to $14,000 cash into the account in the name of the person with the disabilities.
Total contributions from all sources can not exceed $14,000 each year. The amount is tied to the annual federal gift tax exclusion.
The contributions to an ABLE account are not deductible for income tax purposes.
The first $100,000 in an ABLE account will not adversely affect the individual’s eligibility for SSI. So that sort of limits the total amount in the account. But as long as the funds are used for permitted government approved disability related expenditures, the account will continue to accrue value income tax free. Some state may have other limitations, but Nevada does not have any special limitations.
Examples of qualified disability expenses include: housing, transportation, employment training, education, health and wellness expenses.
Medicaid, but not SSI, must be repaid for the cost of services provided to the beneficiary during his or her lifetime.
ABLE accounts must be set up in the state of the owner’s residence. (Section 529 education accounts do not have that requirement).
Time will tell how useful ABLE accounts will be. Another approach is to consider Special Needs Trusts, by gift during donor’s life or by the donor’s Will or Trust at death of the donor.
ABLE accounts may prove useful for certain beneficiaries and give them a better sense of independence.
Did you hear? “I don’t know of a single foreign product that enters the country untaxed except the answer to prayer,” said Mark Twain.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.