Tax Reform Adds New Perks to ABLE Accounts

Article Highlights:

• ABLE Account
• Tax-Deferred Accumulation
• Contribution Limits
• Tax Reform Changes
• Beneficiary Contributions
• Saver’s Credit
• Sec. 529 Plan Rollovers

Note: This is one of a series of articles explaining how the various tax changes in the GOP’s Tax Cuts & Jobs Act (referred to as “the Act” in this article), which was passed in late December 2017, could affect you and your family, in both 2018 and future years. This series offers strategies that you can employ to reduce your tax liability under the new law.

Achieving a Better Life Experience (ABLE) accounts provide the means for individuals and families to contribute and save to support individuals who are blind or became severely disabled before turning age 26, in maintaining their health, independence, and quality of life.

Although contributions to an ABLE account aren't tax-deductible, they do provide a significant benefit by allowing amounts in the account to grow on a tax-deferred basis. Distributions are tax-free up to the amount of the disabled individual’s qualified disability expenses, which generally include housing, transportation, education, and medical necessities.

Only one account can be established for each beneficiary. Prior to the passage of the Act, the maximum annual contribution to an ABLE account by all persons was equal to the annual gift tax exemption, which for 2018 is $15,000. With the passage of the Act, in addition to the $15,000 allowance for all persons, the beneficiary can also make a contribution equal to the lesser of the prior year’s poverty level for a one-person household or the beneficiary’s taxable compensation for the year. For 2017, the poverty level for a one-person household was $12,060, which means for 2018, the beneficiary can contribute an additional amount equal to the smaller of the beneficiary’s taxable compensation or $12,060.

Another perk added by the Act was to allow the beneficiary to qualify for the non-refundable saver’s credit based upon their contribution. The amount of credit depends on the beneficiary’s actual income and can be 10%, 20%, or even as much as 50% of up to the first $2,000 contributed, for a maximum credit of $1,000.

The Act also provides that a distribution from a Sec. 529 qualified tuition plan account is tax-free and penalty-free, provided that it is rolled over into an ABLE account for the same designated beneficiary or a member of the designated beneficiary’s family within 60 days. This rollover provision is only available through 2025. The amount of the rollover is limited, when combined with other contributions, to the annual maximum.

Example: Bill, who finished school and graduated, still has $8,000 in his Sec. 529 plan that his parents had set up to pay for his college tuition. Bill will no longer have any education expenses, so he rolls the balance of his Sec. 529 plan into his blind niece’s ABLE account within the 60 days allowed. There is no tax or penalties on the rollover. However, since contributions to the ABLE account are limited to $15,000 (2018), others may only contribute an additional $7,000 ($15,000 − $8,000) to the niece’s ABLE account.

If you have questions related to ABLE account contributions, the saver’s credit, or rollovers from qualified tuition plans, please give this office a call.