Question: Can you explain how I can use an Able account for my disabled son?
Answer: Relatively new legislation and recent IRS guidance have created a tax savings opportunity for many disabled individuals. In a fashion similar to how college savings or “529 plans” provide incentives for college-bound students, Able accounts can be established for eligible individuals to pay for disability expenses on a pre-tax basis.
To be eligible for an Able account, an individual must have incurred a qualifying disability prior to attaining age 26. Legal blindness will constitute a qualifying disability. A qualifying disability will also exist if the individual either incurs a disability under the Social Security Act or, alternatively, suffers from a medically determined physical or mental impairment that results in marked severe functional limitations that can be expected to last until death or has lasted for a continuous period of not less than twelve months. If your son’s condition fits within these requirements, then an Able account can be utilized.
Contributions to Able accounts are permitted to the extent of the annual gift tax exclusion. That amount is currently $14,000 per year but is indexed and will increase in accordance with a cost-of-living index utilized by the IRS. Unlike the gift tax exclusion which is applied on a donor basis, the annual Able account limitation applies with respect to the disabled individual. An individual may only have one Able account so the aggregate amount of contributions that can be made to your son’s Able account cannot exceed the $14,000 annual limitation, as adjusted. Contributions in excess of the allowable limitation must be returned to the contributor along with any income associated with the excess contribution. Tax deductions are not allowed for Able account contributions.
An Able account is a tax-free account so the earnings on the account will not be subject to income tax. Furthermore, distributions from an Able account are tax-free to the extent the funds are used to pay for qualified disability expenses for the Able account beneficiary.
Qualified disability expenses are broadly defined to include costs for education, housing, transportation, employment training and support and a broad range of other expenditures. Any distributions made for purposes other than qualified disability expenses will be subject to income tax and a 10% excise tax.
In addition to the tax savings, other benefits can be realized from the use of Able accounts. Able accounts are generally not taken into account in determining whether an individual qualifies for need-based financial programs. While an Able account can be created by the disabled individual, the government recognizes that many of the individuals eligible for Able accounts cannot create such accounts for themselves. Parents and guardians are, therefore, permitted to create and fund Able accounts on behalf of eligible individuals. Finally, there are no limitations on the investment income which can be generated from these accounts.
Depending on the nature of your son’s disability, an Able account may be a viable option for subsidizing disability expenses. If so, you should take advantage of the tax savings opportunity the government provides for families in your unfortunate situation.
The Tax Corner addresses various tax, estate, asset protection and other business matters. Should you have any questions regarding the subject matter or if you have questions you want answered, you may contact Bruce at (312) 648-2300 or send an e-mail to bruce.bell@sfnr.com.
