Tax Update: New Tax Benefit for the Disabled - ABLE Accounts

The Achieving a Better Life Experience (ABLE) Act of 2014 was signed into law in December 2014. This new provision authorizes any state to offer its residents the option of setting up an ABLE account. The ABLE account allows people with disabilities, and their families, the ability to save and pay for disability related expenses.

These accounts are modeled after Section 529 college savings plans. Once a state enacts legislation, a qualified ABLE account may be set up by a taxpayer. The account will then be maintained by the state and managed by a financial institution. Contributions to an ABLE account are not tax deductible for federal income tax purposes. However, the earnings on the account are not taxable either. An eligible individual is limited to one ABLE account.

Key points for ABLE accounts are:

• An individual is eligible for an ABLE account if that person is diagnosed with blindness or a disability prior to their 26th birthday.
• The yearly contribution limit is the amount of the annual federal gift tax exclusion, which is currently $14,000.
• States must either pass legislation that allows ABLE accounts to be set up or contract with another state that offers ABLE accounts.
• Distributions are tax-free as long as they are used to pay qualified disability expenses.
• Beneficiaries of ABLE accounts can save up to $100,000 in the plan without losing Medicaid and Supplemental Security Income benefits.

At the present time, each state’s legislature is considering legislation to allow the setup of ABLE accounts. As of the end of June, here is the status of ABLE legislation in each state:

• Enacted (23): Alabama, Arkansas, Colorado, Connecticut, Delaware, Florida, Kansas, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, Nebraska, Nevada, North Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia
• Still considering (13): California, Hawaii, Illinois, Iowa, Michigan, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, Wisconsin
• Will not consider until 2016 (14): Alaska, Arizona, Georgia, Idaho, Indiana, Kentucky, Maine, Mississippi, New Hampshire, New Mexico, Oklahoma, South Carolina, South Dakota, Wyoming

Later in the year, we will be giving additional updates on the status of the legislation in each state and additional details on ABLE accounts once the regulations are finalized. The IRS has just recently released proposed regulations that will govern ABLE accounts. We will update you when these become final later this year.

For more details on ABLE accounts see the following on the IRS website:

• Tax Benefit for Disability
• Proposed Regulations Offer Guidelines for New State-Sponsored ABLE Accounts for People with Disabilities announcement and details on ABLE accounts
• Proposed IRS Regulations for ABLE Accounts (June 19, 2015)