January 5, 2015
By: Melissa A. Terranova
The Achieving a Better Life Experience (ABLE) Act was signed into law and will take effect for tax years beginning after December 31, 2014.
The ABLE Act allows states to set up ABLE programs under which ABLE accounts similar to section 529 savings accounts can be opened for certain individuals who became severely disabled prior to reaching age 26. ABLE accounts will help in meeting the financial needs of families raising children with disabilities and disabled individuals.
Under current law, a child diagnosed with a disability is limited to assets worth no more than $2,000 and a monthly income which cannot exceed $721 without forfeiting eligibility for government programs like Supplemental Security Income or Medicaid. The ABLE Act will allow a tax-free savings account up to $100,000 to pay for disability-related expenses like housing, transportation, health, prevention and wellness, to name a few.
The accounts may be funded with annual cash contributions up to the annual gift tax exclusion amount (currently $14,000). The amount in an individual’s ABLE account (including earnings), contributions to the individual’s account, and distributions to pay qualified disability expenses are generally disregarded in determining the individual’s eligibility for, or the amount of, any assistance or benefit authorized by any federal means-tested program like Supplemental Security Income or Medicaid.
ABLE accounts will not appear on the scene right away. The IRS has been given six months to write regulations implementing the law. After those are in place, states will be free to establish ABLE programs. Once fully implemented, the ABLE Act will offer a powerful new tool for disability planning.