Tax benefits of an ABLE account
The Achieving a Better Life Experience (ABLE) Act of 2014 allows states to create tax-advantaged savings programs for eligible people with disabilities (designated beneficiaries). Funds from these 529A ABLE accounts can help designated beneficiaries pay for qualified disability expenses. Distributions are tax-free if used for qualified disability expenses.
I’m a huge advocate of ABLE accounts. If you’ve heard me speak about special needs planning, you’ve heard me speak on the benefits of ABLE accounts and how wonderful they are.
In general, individuals are eligible for an ABLE account if they are already receiving benefits under Supplemental Security Income (SSI) and/or Social Security Disability Insurance (SSDI). If not, they may still be eligible if they certify that they are blind or disabled and have a written diagnosis of their condition by a licensed physician (see the blog post on how to set up an account). Under all circumstances, the diagnosis must have been made or the disability must have occurred prior to age 26.
These are the main tax benefits of an Alabama ABLE account to keep in mind:
Tax deductions for contributions made to an Alabama ABLE account. Beginning in 2021, Alabamians paying Alabama income tax can start deducting contributions made to an Alabama ABLE Savings Plan. The deductible account of an amount up to $5,000 per year, per taxpayer on State Income Taxes ($10,000 for a married couple filing a joint return). The deduction may include monies rolled over/transferred from another ABLE account.
Earnings in an ABLE account grow tax-deferred, and withdrawals are tax-free when used for qualified disability-related expenses, including, but not limited to, education, housing, transportation, assistive technology, employment training and support, financial management and health care expenses. Money in an ABLE account can be used over the lifetime of the beneficiary so long as funds are used for qualified expenses.
The first $100,000 saved in the account is exempted from the Supplemental Security Income $2,000 limit (beneficiaries will still receive Medicaid if the account exceeds $100,000).
As long as the money in your Alabama ABLE account is used for eligible expenses, it won’t be counted as income for your state or federal taxes.
If a purchase doesn’t qualify as an eligible expense, you’ll have to pay income taxes and a 10% penalty on the amount.
If you have questions about setting up your ABLE Account or need further assistance, feel free to call Alabama ABLE at 1-833-711-2253 or the author of this blog, Jennifer McInerney, at JMcInerney@ParmerLaw.com.
