How is the Virginia ABLE Act Affected by the Tax Overhaul?

Q. My sister Sophie is intellectually disabled, but has a knack for baking. She recently enrolled in cooking school to work towards her dream of becoming a pastry chef. My family has been assisting Sophie with her educational expenses by contributing to an ABLE account for her, because it doesn’t affect any other government benefits for which she may be eligible. Last year, accounts were limited to $14,000 in deposits per year. I heard that amount has been increased to $15,000 this year, which is great. What I’m concerned about is if the ABLE Act will be affected by the new tax law, and if so, how? Thanks for your help!

A. ABLE (or Achieving a Better Life Experience Act) accounts allow individuals, such as your sister, the opportunity to save and fund a variety of Qualified Disability Expenses without endangering eligibility for certain benefits that are critical to their health and well-being, such as Medicaid and Supplemental Security Income (SSI).

Late last month, the Tax Cuts and Jobs Act of 2017 was signed into law with most provisions applicable beginning in calendar year 2018. Virginia529, the agency that administers the ABLEnow program in Virginia, as well as the country’s largest college savings plan, closely monitored this legislation and met with legislators in December to discuss aspects of the proposal.

For 2017, and for tax returns filed in 2018, there are no changes to ABLE programs. However, there are some changes for years to come.
For instance, a provision in the new tax law allows families who have saved money in 529 savings accounts to roll over up to $15,000 each year from a 529 account to an ABLE account. To do so, the 529 account must be for the same beneficiary as the ABLE account or for a member of the same family as the ABLE account holder. Many disability advocates had previously pushed for this change via a bill known as the ABLE Financial Planning Act.

Also as part of the new tax bill, while 529 accounts could previously only cover costs for college, they can now pay for a child’s K-12 education in a public, private or religious school.

Mary Morris, CEO of Virginia529 and ABLEnow stated, “Along with disability advocates and other ABLE program managers, we hope to see future legislation that removes even more ABLE Act restrictions to expand this empowering financial tool to additional Americans with disabilities. We will continue to work with sponsors in Congress to move ABLE programs forward.”

Below is an overview of ABLE Act updates resulting from the new tax law:

  • Inflation Adjustments: The Internal Revenue Service (IRS) recently announced a multitude of tax year 2018 annual inflation adjustments, including an increase to Section 2503, the federal gift tax exclusion. Section 529A(a)(2) of the Stephen Beck Jr. Achieving a Better Life Experience (“ABLE”) Act (PL 113-225)
  • The annual contribution limit for ABLE accounts will be tied to section 2503(b) of the federal tax code, so any inflation adjustment to this section automatically adjusts the annual ABLE contribution limit.
  • The tax bill also includes changes to benefit ABLE account beneficiaries earning income from employment. These individuals will be able to make ABLE contributions above the $15,000 annual cap from their own income up to the Federal Poverty Level, which is currently $11,770 for a single individual, provided they do not participate in their employer’s retirement plan. This change was previously proposed in legislation known as the ABLE to Work Act.
  • Savers’ Tax Credit: Individuals saving in an ABLE program may be able to take advantage of the Savers’ Credit for contributions to their ABLE account (subject to all existing eligibility and income limits).
  • ABLE Financial Planning Act: Transfers from a 529 college savings account to an ABLE account are considered a qualified distribution, providing flexibility to move funds between programs without incurring any tax or penalty.
    The rollover can be in amounts up to the annual ABLE contribution limit.
    Both accounts must have the same beneficiary or a member of the same family.

For more information about ABLE accounts, please visit the ABLE National Resource Center at www.ablenrc.org. For the ABLE Act in Virginia, visit ablenow.com. Please also refer to our article about the ABLE Act, here (link to https://www.farrlawfirm.com/critter-corner-2/critter-corner-able-account-loved-one-disability/).

Have an ABLE account? Why a Third-Party Special Needs Trust is Still Recommended

Although your family already has an ABLE account in place for your sister, a Third Party Special Needs Trust is still highly recommended. Why? Unlike an ABLE account, assets remaining in a properly established Third Party Special Needs Trust are not recoverable by Medicaid at the time of the beneficiary’s death, because a Third Party Special Needs Trust is funded using the assets of a parent, grandparent, sibling, or other third party. This allows the creator of the trust and other family members to provide for a secondary beneficiary. Therefore, an ABLE account should NOT be used as a substitute for a Third Party Special Needs Trust, but rather only a limited substitute for a First Party Special Needs Trust. A Third Party Special Needs Trust is recommended to protect a disabled individual’s financial future. This type of trust preserves legal eligibility for federal and state benefits by keeping assets out of the disabled person’s name while still allowing those assets to be used to benefit the person with special needs. Read more here.

Special Needs Planning

When it comes to special needs planning, The Farr Law Firm can guide you through this process. If you have a loved one with special needs, call us to make an appointment for a no-cost initial consultation:

Fairfax Special Needs Attorney: 703-691-1888
Fredericksburg Special Needs Attorney: 540-479-1435
Rockville Special Needs Attorney: 301-519-8041
DC Special Needs Attorney: 202-587-2797

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