Column: For ABLE account holders, it’s time to plan for 2016

Last year, recognizing the often significant additional costs accrued by people who either live with disabilities or have loved ones who do, President Barack Obama signed into law the Achieving a Better Life Experience Act. Beginning Jan. 1, the ABLE Act allowed each state to establish tax-free savings accounts to help individuals with disabilities.

Now is the right time for people who have created ABLE accounts to begin preparing for the 2016 tax season.

As millions who live with disabilities depend on a wide variety of public benefits, eligibility for these public benefits requires a resource test that limits eligibility for individuals who have more than $2,000 in cash savings, retirement funds and other items of significant value.

To remain eligible for these benefits, individuals must remain financially limited.

This is where the ABLE Act helps. The ABLE Act was implemented to ease financial strains by making tax-free savings accounts available to cover qualified expenses related to the individual”™s disability, such as health, education, housing, transportation, employment training, assistive technology, personal support and related services and expenses.

The account created through the ABLE Act would supplement, but not supplant, benefits provided through private insurance, Medicaid, Supplemental Security Income, the beneficiary”™s employment and other sources. It provides individuals with disabilities the same types of flexible savings tools that other Americans have through college savings accounts, health savings accounts and individual retirement accounts.

For those who have not yet established an ABLE account, yet who qualify, this is also the time to get started toward receiving the benefits the act provides.

For those who already have accounts, it is important to realize that contributions into an ABLE account can be made by anyone and are not tax-deductible. Distributions to an eligible individual for qualified expenses, including portions attributable to investment earnings generated by the account, are not taxable. However, distributions used for nonqualified expenses would be subject to income tax on the portion of such distributions attributable to earnings from the account, plus a 10 percent penalty on such portion. This makes planning ahead a wise move.

Each disabled person is limited to one ABLE account, and the total annual contributions by all individuals to any one ABLE account could be made up to the gift tax exclusion amount for a particular year ($14,000 for 2015). Aggregate contributions are subject to the state limit for education-related Section 529 accounts. ABLE accounts can generally be rolled over only into another ABLE account for the same individual or into an ABLE account for a sibling who is also an eligible individual.

Eligible individuals must be blind or severely disabled, and must have become so before turning age 26, based on marked and severe functional limitation or receipt of benefits under the SSI or Social Security Disability Insurance. An individual does not need to receive benefits through those programs to open or maintain an ABLE account, nor does the ownership of an account confer eligibility for those programs.

Individuals with ABLE accounts could maintain eligibility for benefit programs such as Social Security and Medicaid. The bill exempts the first $100,000 in ABLE account balances from being counted toward SSI”™s $2,000 individual limit. However, account distributions for housing expenses would be counted as income for SSI purposes. Assuming an individual has no other assets, if the balance in the individual”™s ABLE account exceeds $102,000, the individual would be suspended, but not terminated, from eligibility for SSI, but remain eligible for Medicaid.

Prior to the ABLE Act, the most common means of providing for expenses of a disabled person was a special needs trust. Those are normally more complex, requiring a formal trust agreement and an annual tax return filing, and the earnings within the trust are considered taxable. There are still significant benefits to these trusts, though the ABLE Act provides another viable mechanism of support.

Those who qualify for ABLE accounts but have not yet accessed them should consider doing so now. Those who have them should consider the benefits and be mindful for tax planning.

Scott J. Centi is a tax manager in BlumShapiro”™s Shelton office. BlumShapiro has offices in Connecticut, Massachusetts and Rhode Island, with nearly 400 professionals and staff offering services that include auditing, accounting, tax and business advisory. His email is scenti@blumshapiro.com.