3 Gifts the TCJA Gives to ABLE Accounts– September 25, 2018 by Donna Jenkins

“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.”
This quote from Donald Rumsfeld likely rings a bell with any parent of a child with special needs. One of the things that keeps parents up at night is worrying about what will happen to their son or daughter when they can no longer care for them. There is a good amount of special needs planning that can be done proactively, but it’s the things you don’t know and can’t plan for — “the unknown unknowns” — that cause parents to wake up in the middle of the night in a cold sweat.
One recent development that may offer some comfort comes from the Tax Cuts and Jobs Act (TCJA) and the three positive changes it made to ABLE (Achieving a Better Life Experience) accounts. 

What is an ABLE Account?

Created by a federal act, an ABLE account is a program administered at the state level to provide a savings vehicle for people with disabilities. They have two big advantages over regular savings accounts: 

  1. Income earned is generally tax-free or at least tax-deferred, and
  2. Properly structured accounts will not cause a disabled person to lose eligibility for means-tested benefits such as Medicaid and Social Security insurance. 

Contributions can be made by anyone, including the owner of the account, but are limited to a yearly amount equal to the annual gift tax exclusion ($15,000 for 2018). Total account balances are also subject to a limit, which is the same as the state’s limit for contributions under its existing 529 plans. 

How Does the TCJA Change ABLE Accounts?

There are three main changes that will make a positive impact on these types of accounts: 

1. Additional contributions. Additional contributions, beyond the annual gift tax exclusion amount, can be made by the owner of the account in the amount of the total earned income for the year or the federal poverty line of the previous tax year (up to $12,060 for tax year 2018), whichever is lower.

The fine print:  The owner of the account must be an employee (but can be self-employed) and cannot make contributions to a retirement plan such as a 401(k), 403(b) or 457(b). 

2. Saver’s credit. The owner of the ABLE account can now take a credit of up to $1,000 for contributions of earned income made to the ABLE account.

The fine print:  The credit is nonrefundable so will only be useful to an ABLE account owner with a tax liability, and the maximum amount of the credit is based on a formula that looks at both income and the amount contributed to the ABLE account. 

3. Rollovers of 529 accounts. Funds from a 529 account can now be rolled into an ABLE account.

The fine print:  The rollover is subject to the annual limit noted above ($15,000 for 2018), and funds from a 529 can come from both the owner of the ABLE account as well as family members with 529 accounts. The family circle that can be used is wide. Family members can be brother, sister, father, mother, niece, nephew, aunt, uncle, step relations, in-laws, spouse and first cousins. Transferring surplus funds from a sibling’s 529 account or from dollars otherwise stranded in a 529 could be a great way to use the extra funds. 

Another option to consider regarding 529 plans is to “front load” a plan with up to five years of contributions at one time, which can be done without any gift tax consequences. So for 2018, $75,000 (or $150,000 for married filing jointly) could be contributed to a 529 Plan. The amount could then be gradually rolled over to an ABLE account. 

The fine print:  No additional money can be contributed to or funds distributed from the 529 account in the following five years. Also, care should be taken not to over contribute if the owner of the ABLE account is collecting means-tested benefits.

All of the above changes apply to taxable years beginning after December 22, 2017, through December 31, 2025. Since these provisions sunset, grab these gifts from the TCJA while you can. 

Please contact a member of your service team, or contact Alane Boffa at aboffa@cohencpa.com for further discussion.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.