Don't Mess With Taxes

Saving is a key component to reaching financial independence. However, for individuals facing added challenges, putting aside money for the future can be difficult.

Achieving a Better Life Experience, or ABLE, accounts were created in 2014 to help in these cases. They are tax-advantaged savings accounts for individuals with disabilities (and their families) to help them maintain their health, independence, and quality of life.

While money put into ABLE accounts isn't tax-deductible, the distributions are tax-free when they are used to pay qualified disability-related expenses.

Here are some key questions and answers about ABLE accounts.

Who is eligible for an ABLE account? ABLE accounts can be opened for people who were 25 or younger when they became disabled. When the account is opened for a younger disabled person, that individual is referred to as the account beneficiary.

Working individuals are eligible to open their own ABLE accounts.

Individuals who meet the age requirement and who are getting Social Security Disability Insurance (SSDI) and/or Supplemental Security Income (SSI) payments are automatically eligible to open an ABLE account. Individuals not receiving these government benefits, but who meet the disability onset age and satisfy disability certification requirements also can open an account.

One quick note about the ABLE age limit. You don't have to be younger than 26 to be eligible for an account. But if you are older, the onset of your disability must have been before your 26th birthday in order to open an ABLE account.

How much can be contributed and by whom? Up to a maximum of $15,000 a year can be contributed to an ABLE account. Contributions can be made by any person, including the account owner/beneficiary, family, friends, and even certain trusts and corporate entities.

Working individuals with their own ABLE accounts can put in more than the annual $15 grand limit. This additional yearly contribution is limited to the poverty level for a single person, which is $12,880 for 2021. That amount is higher for working ABLE account owners in Alaska ($16,090) and Hawaii ($14,820).

The lifetime maximum that can go into an ABLE account is capped at the same level as the 529 plan limit of the state where the account is opened.

Where are ABLE accounts available? The reference to state 529 plans in the contribution Q&A is notable because like those tax-favored higher-education savings accounts, states make the decision to offer ABLE accounts. The good news is that most states offer ABLE accounts. The ABLE National Resource Center (ABLE NRC) map reproduced below — go to the ABLE NRC website to use the interactive version — shows which states have the accounts.

The better news is that even if you were you live doesn't offer an ABLE account, you can enroll in any state's program as long as it accepts out-of-state residents. Again, check the ABLE NRC map/state program links.

Are 529 and ABLE accounts related in other ways? Yes, there are a couple of connections and similarities in the two tax-favored savings options.

The obvious one is that they both are part of section 529 of the Internal Revenue Code, §529 proper for the tuition provisions and §529A for the special savings accounts. But wait. There's more.

As with 529 college savings plans, states offer qualified individuals and families various options with differing investment strategies in setting up an ABLE account. Since it's an investment vehicle, you and your family need to assess possible future needs and costs over time, including account requirements and fees, as well as assess your investment risk tolerance.

There's also another ABLE-529 connection. Families may roll over funds from a 529 plan to another family member's ABLE account. The ABLE account must be for the same beneficiary as the 529 account or for a member of the same family as the 529 account holder.

Rollovers from a 529 plan count toward the ABLE account's annual contribution limit. For example, parents contributing $10,000 to their child's ABLE account and rolling over $5,000 from a 529 plan to the same ABLE account in the same year would meet the $15,000 annual contribution limit.

What expenses can be paid with ABLE funds? Tax-free able distributions of ABLE account earnings can be used to pay for expenses such as housing, basic living expenses, personal support services, assistive technology, education, transportation, health needs (both preventative and wellness), education, job training and support, financial management and administrative services, legal fees, and funeral and burial expenses.

If the funds are used for nonqualified purposes, the withdrawn earnings are taxed and you'll also owe a 10 percent penalty.

What are the tax benefits of ABLE accounts? Contributions must be made with already taxed money, meaning, as previously noted, they aren't tax deductible at the federal level. However, an ABLE account owner/beneficiary may be able to use the contributions to claim the Saver's Credit. This is a tax credit of up to $1,000. The exact nonrefundable credit amount is based on a percentage of contributions to retirement and ABLE accounts as long as individuals who meet all three of these requirements:

• Are at least 18 years old at the end of the taxable year,
• Are not a dependent or a full-time student, and
• Meet the income requirements.

At the state level, some states may allow for income tax deductions for contributions made to an ABLE account.

When you make contributions, you'll receive Form 5498-QA, ABLE Account Contribution Information. For distributions, you'll get Form 1099-QA, Distributions from ABLE Accounts. Both forms (which now, shameless plug, are added to the Tax Forms Fiesta! page) will contain relevant account for designated beneficiaries. The combination instructions for both forms has more information.

As with other third-party tax documents, copies of both forms will go to the Internal Revenue Service. So keep them in your records and have them handy in case there are any related tax implications or IRS questions.

Where can I find more about ABLE accounts? You can read more about the accounts (and more) in IRS Publication 907, Tax Highlights for Persons With Disabilities, as well as the agency's special page ABLE accounts page and it's one on ABLE accounts and the Saver's Credit.

Other resources to check out include the previously mentioned ABLE National Resource Center; the National Disability Institute; the Financial Industry Regulatory Authority or, if your acronym fluent, FINRA; the Special Needs Answers' ABLE web page; and the Saving For College look at these accounts.

You also might find these items of interest:

• Tax considerations of blind filers
• 6 special situations where the EITC could help
• Work Opportunity Tax Credit can help businesses meet staffing needs, save on taxes

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