ABLE: A Tax Planning Tool for People with Disabilities
With proposed "reliance" regulations (REG-102837-15) having been issued on the new qualified ABLE (Achieving a Better Life Experience) programs, these tax-advantaged accounts for eligible disabled taxpayers can soon begin providing tax savings for beneficiaries. ABLE programs were created as part of the Tax Increase Prevention Act of 2014, P.L. 113-295. They will be available for tax years beginning after Dec. 31, 2014, and can be established and maintained by the individual states (or their agencies or instrumentalities). As of mid-September, 31 states had enacted ABLE legislation. While ABLE programs are new, the concepts behind them are not. An ABLE program allows a person to contribute cash to an account, invest the money how the account's designated beneficiary chooses, and take tax-free distributions from the account if the distributions are used to pay qualified disability expenses. The regulations strictly limit the frequency with which the beneficiary can change the investments in an ABLE account. According to Sec. 529A(b)(4), a program will not be treated as a qualified ABLE program unless it provides that any designated beneficiary under the program may direct the investment of any contributions to the program (or any earnings) no more than two times in any calendar year. Many other rules in the proposed regulations provide guidance on requirements to be eligible for an ABLE account, qualified disability expenses, limits on contributions and distributions, as well as other issues. [ILLUSTRATION OMITTED] ELIGIBLE INDIVIDUALS To be eligible for an ABLE account, an individual must be deemed disabled before the age of 26 in either of two ways: (1) The individual is entitled to benefits based on blindness or disability under Title II or XVI of the Social Security Act, or (2) the individual files a disability certification with the IRS for the tax year (Sec. 529A(e)(1)). The disability certification must state that the individual has a medically determinable physical or mental impairment that results in marked and severe functional limitations and that can be expected to result in death or have lasted for a continuous period of not less than 12 months, or is blind, and the disability or blindness occurred before the age of 26. An eligible individual can have only one ABLE account at any time, and he or she must be a resident of the state in which the account is maintained (or of a state contracting with that state). Eligibility must be redetermined annually. Because eligible individuals often will not be able to set up their own accounts because of their disabilities, the rules allow a person with a power of attorney for the individual or the individual's parent or guardian to set up the account. QUALIFIED DISABILITY EXPENSES The proposed regulations define qualified disability expenses relatively broadly as expenses that are related to the eligible individual's blindness or disability and are made for the benefit of the eligible individual. The regulations provide examples, including expenses for education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administration services, legal fees, expenses for oversight and monitoring, funeral and burial costs, and other expenses the IRS approves. CONTRIBUTIONS AND DISTRIBUTIONS Contributions to an individual's ABLE account are not excluded from the contributor's gross income. Aggregate contributions from all sources to a single account for a particular year may not exceed the amount of the annual Sec. 2503(b) gift tax exclusion for that tax year. The exclusion is adjusted annually for inflation; for 2015, it is $14,000. …