Recent federal tax reform legislation has added several favorable new tax provisions for ABLE (Achieving a Better Life Experience) accounts. ABLE accounts are tax-advantaged savings accounts for individuals with disabilities that are typically used to cover qualified disability expenses. Generally, an ABLE account is disregarded for purposes of determining eligibility for, and the amount of, any assistance or benefit provided under certain means-tested federal programs.
ABLE account basics
A disabled person (or the disabled individual’s parent or guardian, or an agent with a power of attorney) can create an ABLE account under a state’s ABLE program. Generally, only one ABLE account is permitted per disabled person at a time, and the person with the account must have become disabled prior to age 26.
Distributions from an ABLE account can be made only to the designated beneficiary. The ABLE account and distributions for the designated beneficiary’s qualified disability expenses are generally not subject to federal income tax, and some states may offer tax incentives to residents.
Contributions to an ABLE account are subject to an annual and a cumulative limit. The annual limit for total contributions by all contributors combined is equal to the federal annual gift tax exclusion amount ($15,000 in 2018), increased for certain contributions from compensation of individuals with disabilities in 2018 to 2025. The cumulative limit is equal to the state’s maximum aggregate limit for all Section 529 qualified tuition program accounts for the beneficiary. A contribution cannot be made to the extent that it would cause the account balance to exceed that limit.
For 2018 to 2025, the annual limit for contributions to an ABLE account can be increased above the annual gift tax exclusion amount if the designated beneficiary makes certain contributions from compensation to the ABLE account. The increased contribution limit for contributions by the designated beneficiary cannot exceed the lesser of (a) the compensation includable in the designated beneficiary’s gross income for the year, or (b) the poverty line for a one-person household (as determined for the previous year). For 2018, the poverty line limit is generally $12,140. For this purpose, the designated beneficiary must be an employee for whom no contribution is made for the year to a defined contribution plan, a 403(b) annuity contract, or certain eligible deferred compensation plans of a government unit or tax-exempt organization.
Rollover to ABLE account
From December 23, 2017 to December 31, 2025, certain distributions from a 529 plan can be rolled over to an ABLE account in a nontaxable event. The ABLE account beneficiary must be the designated beneficiary of the 529 plan, or a member of the family of the designated beneficiary of the 529 plan. The rollover is limited to the amount that, when added to all other contributions made to the ABLE account for the taxable year, would not exceed the annual gift tax exclusion limit for contributions to the ABLE account.
Previously, the only rollover permitted to an ABLE account was a rollover from an ABLE account of the same beneficiary or an eligible brother or sister. Only one rollover is permitted to any ABLE account of the same designated beneficiary within a 12-month period. Direct program-to-program transfers may be allowed to change the designated beneficiary or the state program.
For many years, the saver’s tax credit has been available to certain individuals making eligible contributions to IRAs or employer-sponsored retirement plans. For 2018 to 2025, the saver’s credit may also be available to ABLE account beneficiaries who contribute to their own accounts. The amount of the credit is a percentage of the individual’s aggregate contributions for the year, up to $2,000. The credit percentage depends on the individual’s tax filing status and adjusted gross income. The credit is not available if the individual has not attained age 18 for the year, is a dependent of another taxpayer, or is a full-time student.