Tax-advantaged ABLE accounts can help customers with disabilities pay for their expenses

July is Disability Pride Month, commemorating the historic Americans with Disabilities Act of 1990. In the 32 years since, we have seen the federal government continue to take action to help people with disabilities and protect them from discrimination. However, many people with disabilities have felt the negative effects of the pandemic disproportionately compared to other Americans.

Fortunately, the Tax Code provides many people with the opportunity to take advantage of special programs to help pay for the disability-related expenses they incur. One such program goes by the acronym ABLE, named after the Achievement of a Better Life Experience Act of 2014. People with disabilities and the tax professionals who advise them should be aware that an ABLE account can be an important way for people with disabilities to help pay for eligible 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-advantaged ABLE account to maintain their health, independence and quality of life.

An ABLE account is a tax-advantaged savings account that can accept contributions for an eligible disabled or blind person, and who is the designated beneficiary and owner of the account. The account is used to cover eligible disability expenses.

In addition, ABLE allows states to create tax-advantaged savings programs for eligible persons with disabilities (designated beneficiaries). Funds from these ABLE 529A accounts can help named beneficiaries pay for eligible disability expenses. Distributions are also non-taxable if used for eligible disability expenses.

ABLE Federal Contribution Limits

The total annual contribution limit for ABLE account holders has increased to $16,000 in 2022. Active account holders who do not participate in an employer-sponsored pension plan may be eligible to contribute beyond this ABLE annual contribution limit. The additional annual contribution is equal to the federal poverty level for a one-person household ($12,880 in 2022) or the account holder’s income, whichever is lower. Active account holders are not eligible to contribute additional funds if they are already contributing to a retirement plan, such as:

  • A defined contribution plan;
  • An annuity contract; Where
  • A qualifying deferred compensation plan.

Individuals and their tax advisors should review their ABLE account rules and contribution limits.

How are ABLE distributions taxed?

Earnings from an ABLE account are not taxed unless a distribution exceeds a designated beneficiary’s eligible disability expenses. A named beneficiary does not include distributions for eligible disability expenses in income. Eligible disability expenses include all expenses incurred while the named beneficiary is an eligible person. Expenses must be related to blindness or disability, including expenses for the maintenance or improvement of health, independence or quality of life.

Are ABLE contributions deductible?

Contributions to an ABLE account are not tax deductible and must be 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 people with disabilities to help pay for their disability-related expenses. In addition to contributions from account holders, family members and others wishing to help can contribute. Funds in the account grow tax-free, with distributions used to pay for eligible disability-related expenses receiving tax-free treatment.

IRS guidance regarding these ABLE accounts can be found here at ABLE Accounts – Disability Tax Benefit (IRS) and ABLE accounts can help people with disabilities pay for disability-related expenses.

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