Achieving a Better Life Experience Accounts

Disability-related expenses are often significant. The Achieving a Better Life Experience (ABLE) Act, signed into law by President Obama this past December, aims to help individuals and their families save money for future expenses. The Act amends the tax code to allow for tax-advantages in state-created ABLE savings accounts.

Eligibility

Pursuant to the Act, eligible individuals are those “entitled to benefits based on blindness or disability under…the Social Security Act.” In addition, onset of the blindness or disability must have occurred before the individual turned 26 years of age. It is important to note that an individual need not be receiving benefits under the Social Security Act; such individuals need only to be eligible for benefits. Additionally, an individual does not need to be under the age of 26 to open an ABLE account. The requirement is only that the blindness or disability occurred before the individual turned 26.

An eligible person may set up an ABLE account for themselves or families may set up an account to provide for their dependents. However, an individual is limited to having only one ABLE account.

Tax Implications

According to §102 of the Act, the income earned by ABLE accounts is tax-free when used to pay for disability-related expenses, including, but not limited, to:

1.      education;

2.      housing;

3.      transportation

4.      employment training and support;

5.      assistive technology and personal support services;

6.      health; and

7.      prevention and wellness.

If a distribution is made but not used for disability-related expenses, the amount distributed is subject to income tax and an additional 10% penalty.

The total maximum annual contributions that may be made to an ABLE account are capped in connection with the gift tax exclusion law, which for 2015 is $14,000. This means that contributions up to $14,000 are not subject to any tax. The gift tax law is adjusted annually for inflation, so this amount may change in the future.

Other Items of Note

Importantly, under Title I, the Act states its purpose as being to supplement benefits provided by private insurance, Medicaid, and the supplemental security income program. As a result, ABLE accounts will not be used as a substitute for other programs designed to help individuals with disabilities. Instead, ABLE accounts can be utilized as a means to address the significant costs of living with a disability.

The Act makes it the responsibility of each state to establish an ABLE program, meaning it is possible that your particular state may choose not to participate. Currently, the Treasury Department is developing regulations and guidance to assist states in establishing and maintaining an ABLE program. Pursuant to the Act, the Treasury Department has six months from enactment to complete this work.

Conclusion

The creation of ABLE accounts will serve to help millions of Americans and their families face the financial challenges that can arise as a result of a disability. These accounts will allow for better planning and preparedness for long-term expenses. If you have tax questions, including those relating to ABLE accounts, and live in the Bay Area of California, please contact the Royse Law Firm today.

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Roger Royse
rroyse@rroyselaw.com

Roger Royse, the founder of the Royse Law Firm, works with companies ranging from newly formed tech startups to publicly traded multinationals in a variety of industries. Roger regularly advises on complex tax structuring, high stakes business negotiations and large international financial transactions. Practicing business and tax law since 1984, Roger’s background includes work with prominent San Francisco Bay area law firms, as well as Milbank, Tweed, Hadley and McCloy in New York City.
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