The Achieving a Better Life Experience (ABLE) Act of 2014 provided the creation of tax-favored savings accounts and, more importantly, the opportunity for disabled persons to save money in these accounts and help supplement their disability-related expenses. Distributions and earnings from these accounts are tax-free if they are used towards certain qualified expenses.
Account-ABLE
ABLE accounts are available to persons whose disabilities occurred before 26 years of age. Qualified disabled persons are the beneficiary of the account during their lifetime. Family, friends, organizations, and even the beneficiaries themselves are allowed to make contributions to these ABLE accounts, with a contribution limit set at $15,000 per year. Excess contributions are returned to contributors. Contributions to ABLE accounts are not tax deductible and must be made in cash or cash equivalents. However, beneficiaries making contributions to their ABLE accounts may also qualify for the Savers Credit. ABLE accounts are administered by different state programs (such as CalABLE) and so the application process to obtain an ABLE account and the cumulative limit held in those accounts may vary by state.
ABLE Earnings & Distributions
Distributions from ABLE accounts are generally tax-free when used towards qualified disability expenses, such as housing, education, transportation, and support services. Earnings in ABLE accounts are not taxed unless they may exceed the beneficiary’s qualified disability expenses for the year. It would then be included in income. For example:
Ted is the beneficiary of an ABLE account. In 2019, the account earned $300 in interest and he received $5,000 in contributions from family and friends bringing it to a balance of $5,300. Ted had qualified disability expenses of $1,500 in 2019 but had a qualified distribution of $2,000.
($1,500 expenses / $2,000 total distribution) x $300 earned interest = $225 nontaxable.
$300 earned interest – $225 nontaxable amount= $25 to be included in Ted’s gross income.
ABLE savings accounts are uncommonly-known benefits of the tax code that qualified taxpayers can utilize. There are many features in the tax code that individuals and businesses may qualify for, but may not even know about! Consulting with a trusted tax advisor can help businesses utilize these benefits and push their businesses to their full potential. MiklosCPA has been trusted by many small and emerging businesses with their tax matters and accounting support needs. Learn how we can help your business succeed by getting in touch. Also follow our social media pages for other “good-to-know” tax tip articles like this one!