Included within the “extenders” law passed in December is a new tax benefit designed to help the disabled. The Achieving a Better Life Experience (ABLE) Act allows those who become blind or disabled before age 26 to open tax-exempt savings accounts to pay qualified expenses related to their illness.
What Are ABLE Accounts?
ABLE accounts operate much like a Section 529 college savings plan. For example, investment earnings are not taxed. Additionally, withdrawals are tax free as long as they are used to pay qualified expenses such as home health aides, transportation and medical technology.
Disbursements for nonqualified expenses (to the extent they represent investment earnings in the account) are subject to income tax plus a 10% penalty. Upon the death of the account holder, the assets are first used to pay back Medicaid benefits received after the ABLE account was established. The balance goes to the account’s designated beneficiary.
Each eligible person can open only one ABLE account. The annual contribution limit is the same as the gift tax exclusion ($14,000 for 2015). This amount is the maximum no matter how many people contribute to the ABLE account. Keep in mind that contributions to an ABLE account are not tax-deductible.
Limitations of ABLE Accounts
However, the accounts do have some limitations. Balances in an ABLE account can only be transferred into another ABLE account belonging to the same individual or to a family member who also qualifies. Older disabled people may not qualify because of the stipulation that the disability must have occurred prior to age 26. On the plus side, the amount you accrue in an ABLE account will not affect financial eligibility for Supplemental Security Income or Medicaid payments. However, SSI eligibility is suspended once the account reaches $100,000.
To learn more about this and other important health-related tax benefits, please give us a call at 419.629.3494.