Late in 2014, Congress passed and President Obama signed into the law the Achieving a Better Life Experience (ABLE) Act. The new law, which enjoyed strong bipartisan support, authorizes the creation of tax-favored accounts for qualified individuals challenged by disabilities. Congress instructed Treasury and the IRS to quickly issue guidance and the agency did so in June. The new guidance covers how to establish ABLE accounts, funding for these accounts, qualified distributions, and various reporting requirements.
ABLE accounts
ABLE accounts are intended to encourage individuals and families to establish a tax-favored savings account to assist and support individuals with disabilities. Contributions to an ABLE account are not deductible, but qualified distributions for certain expenses are excluded from taxation.
Creation
ABLE accounts must be created under a state program. Currently, many states are in the process of setting up an ABLE program. If a state does not establish and maintain an ABLE program, the law allows it to contract with another state to provide an ABLE program for its residents.
Eligibility
Generally, an individual is an eligible individual for a tax year if, during that year, either the individual is entitled to benefits based on blindness or disability under Title II or XVI of the Social Security Act and the blindness or disability occurred before the date on which the individual attained age 26, or a disability certification meeting specified requirements is filed with the IRS. In some cases, the IRS explained that individuals may be unable to establish an account themselves. If the eligible individual cannot establish the account, the eligible individual’s agent under a power of attorney or, if none, his or her parent or legal guardian may establish the ABLE account for that eligible individual.
Contributions and distributions
Total contributions to an ABLE account per calendar year cannot exceed the annual gift tax exclusion (which is $14,000 for 2015). Additionally, state must provide adequate safeguards to ensure that total contributions to an ABLE account do not exceed the state’s limit for aggregate contributions under its qualified tuition program. The ABLE Act allows for direct and indirect investment of contributions to the program or earnings no more than two times in any calendar year. If distributions from an ABLE account do not exceed the designated beneficiary’s qualified disability expenses, no amount is included in the designated beneficiary’s gross income. Otherwise, the distribution may be subject to income tax and an additional tax.
Qualified expenses
For ABLE accounts, qualified expenses are expenses that relate to the designated beneficiary’s blindness or disability, and are for the benefit of that designated beneficiary in maintaining or improving his or her health, independence, or quality of life. These include expenses for education, housing, transportation, employment training, and personal support services. The IRS requested comments from interested parties about what types of expenses should be considered qualified disability expenses and under what circumstances. For example, a smartphone could be considered a qualified disability expense if it is an effective and safe communication or navigation aid for an individual with autism.
Reporting and means-testing
The guidance includes various reporting rules. For example, information regarding distributions will be reported on new Form 1099-QA: Distributions from ABLE Accounts. Generally an ABLE account is not to be counted in determining the designated beneficiary’s eligibility for many federal means-testing programs. Special rules may apply to some federal programs.
The new guidance covers many aspects and requirements of ABLE accounts, beyond this high-level review. If you have any questions about ABLE accounts and the IRS’s new guidance, please contact us at (847) 267-9600.