Author: James Polese
If you have, or have a child who has, a disability and the disability began before age 26, the disabled person can open a tax advantaged investment account that does not adversely affect any disability payments currently being received. If the individual with the disability does not receive disability-based benefits, there is a self-certification process so long as the disability meets the Social Security Administration’s standards and the disability causes “marked and severe functional limitations.”
The accounts, known as ABLE accounts, were authorized with the enactment of the Achieving a Better Life Experience (“ABLE”) Act of 2014. ABLE accounts are tax-advantaged hybrid savings accounts established by the individual with the disability who is the designated beneficiary. While contributions to the account are not tax deductible for federal or Arizona income tax purposes, the accounts grow tax-free. The earnings remain tax-free even when they are withdrawn so long as the monies are spent on Qualified Disability Expenses.
Why was there a need for ABLE accounts? Millions of individuals with disabilities and their families have come to depend on a wide variety of public benefits for income, health care, and food and housing assistance. Eligibility for these public benefits requires meeting a means or resource test that severely limits eligibility. In short, to remain eligible for public benefits, an individual had to remain poor. The ABLE Act recognizes that there is a disconnect between the means or resource testing for eligibility in public programs and the significant added costs of living with a disability. Governments simply cannot afford the added costs that would result in lowering the means and resource tests. The ABLE account allows an individual with a disability to circumvent these means tests.
However, there are limits to how much can be contributed to an ABLE account. In Arizona, the limit for a single tax year is $15,000 – up from $14,000 prior to 2018. The annual contribution limit is tied to the allowable annual exclusion for federal gift tax purposes. The annual exclusion limit is the floor; states may increase that limit. For instance, Arizona also allows up to an additional $12,140, if the disabled person has earned income (i.e., wages from a job). Thus, the annual contribution could be as much as $27,140 in Arizona. Whenever the account exceeds the permitted limit established by the state (for Arizona, in 2019, it is $468,000), no further contributions can be made.
ABLE accounts are similar to Section 529 college plans in that the monies are invested in state-sponsored funds. Arizona offers ABLE accounts varied investment strategies. The ABLE Act limits changing the way the account is invested to twice a year.
For individuals with disabilities who are recipients of SSI (Social Security Income), if an ABLE account exceeds $100,000, the beneficiary’s SSI cash benefit would be suspended until such time as the account falls back below $100,000. While the beneficiary’s eligibility for the SSI cash benefit is suspended, this has no effect on their ability to receive or be eligible to receive medical assistance through Medicaid.
The rules for eligibility as well as what constitutes Qualified Disability Expenses are complex but Arizona’s Department of Economic Security has a dedicated website on the issue of ABLE accounts: https://az-able.com/#stable-account.
If you have any questions on Able Accounts or other tax planning strategies, contact James F. Polese. His practice focuses on sophisticated estate/tax planning, with an emphasis on real estate, business organizations and commercial transactions.