NEWS
01/19/2016 09:54 EST | Updated 01/19/2017 00:12 EST

ABLE program provides tax-free savings for disabled children

WASHINGTON — Americans who are disabled or have a dependent who is might be able to take advantage of a series of tax benefits designed to ease the burden.

The newest program, called ABLE, was created in 2014 and is similar to the 529c programs administered by the states for education expenses.

"Supporters of the law pointed out that the U.S. tax code provided significant tax benefits to parents who save money for their children's college education in 529 plans," according to Intuit, publisher of TurboTaxe. "But parents of people with disabilities had no similar way to save for their children's future needs, such as occupational therapy or assisted living."

ABLE accounts allow parents to do just that. Contributions of up to $14,000 — the annual tax-free gift limit — can be made to ABLE accounts. The earnings are not taxable if they are withdrawn and used to pay for disability-related expenses. Among eligible expenses, according to the Internal Revenue Service: housing, education, transportation, medical care, job training and others.

"There's no federal tax benefit, but the money in that ABLE account can grow tax-free," said Kathy Pickering, executive director of the Tax Institute at H&R Block. She called it a "very important mechanism" for attending to the needs of a disabled dependent.

Barbara Weltman, a consultant and author of books on taxes, law and finance, said the program's definition of disability is broad but is restricted to people who became disabled before age 26.

"It's designed to allow for savings for disabled children without causing them the loss of government benefits," she said.

Under the program, the first $100,000 in an ABLE account is not considered a personal asset, according to Intuit. "This is important because federal law generally bars individuals from receiving assistance such as Medicaid, housing aid and Supplemental Security Income if they have more than $2,000 worth of financial assets," the company said.

Congress last month made it easier for people to set up ABLE accounts by removing the residency requirement.

"By allowing ABLE beneficiaries the ability to enrol in programs outside their state, individuals will now have greater options in choosing which program best meets their needs," the National Disability Institute said on its website. "In addition, this could mean qualified persons may have the ability to open an ABLE account much sooner than previously anticipated."

Already, nearly three dozen states have passed legislation implementing the ABLE program, according to the National Down Syndrome Society, one of a consortium of groups advocating for the disabled that had pushed for the law.

The IRS says two new forms will be required for those participating in the accounts: Form 1099-QA for reporting distributions and Form 5498-QA for reporting contributions.

Among other tax breaks or benefits that the IRS says might be available to the disabled: a higher standard deduction for people who are legally blind; a credit for working taxpayers paying the cost of caring for a spouse or dependent who is physically or mentally unable to care for themselves; a deduction for impairment-related work expenses, and a deduction for unreimbursed, disability-related medical expenses.

The IRS says taxpayers also might be eligible for the Earned Income Tax Credit if they are disabled or have a child who is. The refundable credit benefits people with low or moderate income, and the agency estimates that as many as 1.5 million eligible taxpayers with disabilities fail to claim it each year.

The National Disability Institute says the credit is critical "considering the disproportionate number of Americans with disabilities living at or below poverty, as compared to their non-disabled peers."

There are income limits for the credit based on filing status and the number of children in the household. For the 2015 tax year, the maximum credit is $6,242 if there are three or more children in the home. It phases down to $503 for taxpayers with no children.

"If the taxpayer's child is disabled, the age limitation for EITC is waived," the IRS says.

Carole Feldman, The Associated Press