Starting this year, states will begin offering people with disabilities a new savings tool with which they can put aside tax-advantaged funds for the use of qualified disability expenses including, but not limited to, those associated with education, housing and transportation. The Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 (ABLE Act) created I.R.C. § 529A, providing the federal groundwork for ABLE programs that would ultimately be created and run by the states.
New York’s Achieving a Better Life Experience (NY ABLE) Savings Account Act goes into effect April 1 this year and is one of just a few ABLE programs that will be introduced in 2016. The NY ABLE program is expected to be available by the end of this year and will impact 400,000 individuals, New York State Senator David Carlucci told Bloomberg BNA Feb. 12.
Although 34 jurisdictions have enacted ABLE legislation creating such savings programs, most are not expected to be available until 2017. Utah, Florida and Nebraska, however, each expect their ABLE programs to become operational this summer.
Although ABLE programs will vary across the states in terms of overall total contribution limits and tax treatment, funds in a qualified ABLE account will remain tax-free at the federal level. Similarly, Arkansas and Connecticut also preclude ABLE account funds from computation of state taxable income. It is up to each state to determine whether ABLE funds will be taxable at the state level as well as any potential tax benefits that may be offered; many states’ definitive tax treatment of ABLE accounts remains unknown.
Additionally, special needs trusts (first-party, third-party, and pooled) remain financial planning options for some people with disabilities, but there are differences between the operation and rules of such trusts and ABLE accounts. Namely, an ABLE account is tax-exempt at the federal level and possibly the state level, too, depending on the jurisdiction. Generally, special needs trusts are taxable but not considered in the calculation of assets for federal benefits.
Further, ABLE accounts are subject to a $100,000 limit to retain eligibility for Supplemental Security Income (SSI), whereas no such limit exists on contributions for special needs trusts, according to the Special Needs Alliance. Also, ABLE accounts will be subject to an overall limit determined by the state for 529 plans, yet there is no total contribution limit for special needs trusts.
Moreover, a qualified beneficiary (a person with the onset of a disability before the age of 26) for an ABLE account is considered the account owner and can therefore make executive decisions regarding the management and distribution of funds; special needs trusts, however, are managed by trustees rather than the beneficiary. Additionally, special needs trusts are not subject to age restrictions.
Determining whether a trust or ABLE account (or even both) will be beneficial for a person with a disability is largely dependent upon each individual’s circumstance, and such specifics as to individuality should be taken into consideration by tax practitioners and financial planners when advising clients.
Continue the conversation on Bloomberg BNA’s State Tax Group’s LinkedIn page: Should ABLE accounts be tax-exempt at the state level in every jurisdiction?
For more information about state tax issues, sign up for a free trial of the Bloomberg BNA Premier State Tax Library.
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