July is Disability Pride Month, commemorating the landmark Americans with Disabilities Act of 1990. In the 32 years that have followed, we have seen the federal government continue to take steps to aid those with disabilities and protect them from discrimination. Many people with disabilities, however, have felt the negative effects of the pandemic disproportionately from other Americans.
Fortunately, the Tax Code provides opportunities for many to take advantage of special programs to help pay for disability-related expenses they incur. One of those programs goes by the acronym ABLE, named after the Achieving a Better Life Experience Act of 2014. The disabled and tax pros who advise them should be aware that an ABLE account can be an important vehicle for those with disabilities to help pay for qualified disability-related expenses using tax-free funds.
What is an ABLE account?
The ABLE Act was enacted to help people with disabilities or who are blind save money in a tax-favored ABLE account to maintain health, independence and quality of life.
An ABLE account is a tax-favored savings account that can accept contributions for an eligible individual with a disability or who is blind, and who is the designated beneficiary and owner of the account. The account is used to provide for qualified disability expenses.
In addition, ABLE allows states to create tax-advantaged savings programs for eligible people with disabilities (designated beneficiaries). Funds from these 529A ABLE accounts can help designated beneficiaries pay for qualified disability expenses. Distributions are also tax-free if used for qualified disability expenses.
ABLE federal contribution limits
The total annual contribution limit for ABLE account owners increased to $16,000 in 2022. Working account owners who do not participate in an employer-sponsored retirement plan may be eligible to contribute above this annual ABLE contribution limit. The additional annual contribution is equal to the federal poverty line for a one-person household ($12,880 in 2022) or the account owner’s income, whichever is less. Working account owners are not eligible to contribute the additional funds if they are already contributing to a retirement plan, such as:
- A defined contribution plan;
- An annuity contract; or
- An eligible deferred compensation plan.
Individuals and their tax advisors should review their state ABLE account rules and contribution limits.
How are ABLE distributions taxed?
Earnings in an ABLE account aren’t taxed unless a distribution exceeds a designated beneficiary’s qualified disability expenses. A designated beneficiary doesn’t include distributions for qualified disability expenses in their income. Qualified disability expenses include any expenses incurred at a time when the designated beneficiary is an eligible individual. The expenses must relate to blindness or disability, including expenses for maintaining or improving health, independence or quality of life.
Are ABLE contributions deductible?
Contributions to an ABLE account are not tax deductible and must be in cash or cash equivalents. Anyone, including the designated beneficiary, can contribute to an ABLE account.
Lifeline for the disabled
ABLE accounts are an invaluable vehicle for the disabled to help pay their disability-related expenses. In addition to contributions by account owners, family members and others desiring to help may contribute. The funds in the account grow tax-free, with distributions used to pay for qualified disability-related expenses receiving tax-free treatment.
IRS guidance regarding these ABLE accounts can be found here at ABLE Accounts – Tax Benefit for People with Disabilities (IRS) and ABLE accounts can help people with disabilities pay for disability-related expenses.