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ABLE Accounts - Tax Benefit for People with Disabilities

Updated: Nov 2, 2023

Issue# 1112

Introduction

For parents and guardians of children with disabilities, financial planning is a crucial aspect of ensuring a better quality of life for their children. Achieving Better Life Experiences (ABLE) accounts are state-sponsored savings programs designed to assist parents and guardians in paying for qualified disability expenses. These accounts offer several tax advantages and can be an essential tool for families with special needs children. In this article, we will discuss the benefits of ABLE accounts and some essential things to know before opening one.



Tax-Free Investment Earnings

Investment income is typically subject to taxation; however, investment earnings from an ABLE account are not taxed, provided the distributions are used to pay for qualified expenses. This means the money invested in an ABLE account can grow tax-free, making it a valuable savings tool for parents and guardians. Additionally, some states offer tax deductions for contributions to qualified ABLE accounts, further enhancing the tax benefits.

No Impact on Social Security Disability Benefits

Generally, individuals with disabilities may lose eligibility for Social Security disability benefits if their savings exceed $2,000. However, savings in an ABLE account are not considered in this calculation, allowing the beneficiary to accumulate more than $2,000 in an ABLE account without affecting their eligibility for Social Security disability benefits.

Eligibility Criteria

To be eligible for an ABLE account, the beneficiary must have received a diagnosis for the disability before age 26. This means that the account can be opened for a child or an adult, provided the disability was diagnosed before the specified age.

Annual Contribution Limit

The annual contribution limit for an ABLE account is typically equal to the gift tax exclusion, which is $17,000 for 2023. This means that in 2023, a total of $17,000 can be contributed to an ABLE account by all contributors combined. It is important to note that this limit is subject to change and may vary by state.

State-Specific Rules and Benefits

Rules and potential benefits of ABLE accounts may vary by state. Therefore, it is essential to research and understand the specific rules and benefits offered by your state before opening an ABLE account. Some states may offer additional tax deductions or credits, while others may have different contribution limits or investment options.

Conclusion

ABLE accounts are a valuable financial tool for parents and guardians of children with disabilities. They offer tax-free investment earnings, do not impact the eligibility for Social Security disability benefits, and have generous contribution limits. However, it is essential to understand the specific rules and benefits offered by your state before opening an account. By taking advantage of an ABLE account, parents and guardians can help secure a better financial future for their children with disabilities.


Disclaimer: This article is for informational purposes only and does not constitute financial, legal, or tax advice. It is always recommended to consult with a qualified professional or financial advisor to make decisions regarding your individual financial situation. The information provided in this article is based on the laws and regulations in effect as of 2023 and may be subject to change. Ahmad Yama Bassam, the author of this article, is the managing partner at A.Y. Bassam & Co. LLP, A Professional Tax, Accountancy, Business Advisory & Payment Solutions Firm, based in California.
 

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