Individuals under 26 diagnosed with a substantial disability can open an ABLE account, a tax-advantaged savings account. There is a restriction on how much money may be contributed to the budget each year based on how much of a gift tax exemption is available. The cap will rise to $15,000 in 2020 and 2021. This cap will increase to $16,000 in 2022. For federal tax purposes, contributions are not deductible; however, certain jurisdictions may enable deductions for state income taxes. On the other hand, money in an account is not subject to federal or state income taxes as it accumulates.

An Overview of ABLE Accounts

Disability benefits like Supplemental Security Income & Medicaid, which require recipients to have savings and other assets below specific thresholds to stay eligible, can be maintained by setting up an ABLE account under the Achieving a Better Life Experience Act of 2014. These programs, for the most part, exclude funds in an ABLE account from consideration. In many ways, ABLE accounts are like 529 plans.

Tax-free growth and investment of ABLE account funds are available for qualified disability expenses such as education, housing, transportation, training and assistance in finding a job, assistive technology, and other such support services, personal support, and help with daily living tasks such as paying for medical care, funeral and burial costs, and the necessities of everyday life.

ABLE Accounts and the Impact of Tax Reform

The Tax Cuts brought about changes to ABLE accounts, and Jobs Act was enacted in 2018. The recipient can contribute more than the $15,000 maximum to their ABLE account if they earn money. 6 Only the lesser of the beneficiary's taxable income or the federal poverty threshold for a single-person family can be deducted from the supplementary contribution.

When an employer pays an employee retirement plan, the account beneficiary is not entitled to an additional contribution. For low- and moderate-income employees, the Saver's Credit now applies to ABLE account holders as well, as a result of recent tax reform. 6 Form 8880 can be used to claim up to $2,000 in extra contributions made to an ABLE account from income.

ABLE vs. Trusts: Which Is Better?

Special needs trusts have to be used to ensure that family members with disabilities would not be denied government benefits if they were left with assets. To set up a trust, you'll often need the services of an attorney, which may get pricey. 10

For one thing, there is no maximum limit on how much money may be put into a trust. On the other hand, an ABLE account has a state limit for each plan. Over $500,000 in many states, the first $100,000 is protected from affecting the eligibility for Supplemental Security Income.

Is There a Tax Advantage to Using an ABLE Account???

ABLE accounts, similar to 529 plans for saving for college, are managed by the states, and many of them provide tax benefits to account holders. For example, single filers may deduct up to $5,000 in contributions to an ABLE account in Michigan and Arkansas. Both states provide a $10,000 maximum deduction for married couples who file joint returns.

Individual filers in Illinois can deduct up to $10,000, those filing jointly can deduct up to $20,000, and those filing are limited to $3,000 in Kansas. Other states, such as New York and California, do not provide a tax advantage for charitable contributions.

Residents contributing to their own state's ABLE program are eligible for these deductions. Butler advises consumers to look at other plans with cheaper costs and better investment possibilities, although contributions to another state's account will not be deductible. He explains that to receive the tax, "sometimes it is preferable to go with a different approach."

How Much Does It Cost to Create an ABLE Account?

Fees differ from one state to the next, so it's worth it to shop around. For example, citizens of Ohio pay $30 per year, but non-residents pay $42 per year. Annual fees in New York are $45 unless printed statements are requested, a restriction that prevents non-residents from enrolling. The yearly charge in this example is $55.

An ABLE account may also charge investing fees, determined by the funds you choose to invest in. In addition to account maintenance costs, ABLE accounts include an asset management charge, which rewards managers for stock selection and portfolio management, according to Schechner. Investment fees may be deducted from an account balance rather than paid by the account holders.

Do I Need a Special Needs Trust?

A special needs trust, also known as a supplemental needs trust or an ABLE account, has the potential to aid millions of Americans with disabilities. Caudillo says these trusts are more expensive to set up, but they provide greater flexibility in their usage. Additionally, for people who were incapacitated after the age of 26, this is their only alternative.