Tax Incentives That Help Build ABLE Savings
Tax season is the perfect time to review the many tax benefits associated with or that could strengthen an ABLE Savings Plan, the plan designated to help individuals with disabilities save for short and long-term expenses. The ABLE Savings Plan of Massachusetts is Attainable, of which MEFA is the state sponsor. We'd like to highlight four options and tax advantages that you can use to boost your ABLE savings. These include: 1) Saver's Credit 2) Earned Income Tax Credit (EITC) 3) ABLE contributions from a special needs trust or pooled trust and 4) Saving over the $15,000 maximum with employment earnings under the ABLE to Work Act.
I serve as our Attainable Outreach Manager, and while I have gathered the data below directly from the sources I list, I am by no means a certified tax expert. As with any tax information you gather online, work with your own tax accountant to seek out additional information and guidance, and to determine if these benefits are in the best interest of your family.
The Saver's Credit, an option on your federal tax return, is available to ABLE account owners who work and deposit a portion of their earnings into an ABLE account. You are eligible for this credit if you are:
- At least 18 years old at the close of the taxable year
- Not a dependent or a full-time student
The maximum amount of the tax credit is 50%, 20%, or 10% (based on your AGI) of total ABLE (or IRA or retirement plan) contributions. The non-refundable credit is up to $2,000 for an individual or $4,000 for a couple who each owns an ABLE or other qualified savings account and file jointly.
You can view these details and find more information about the Saver's Credit on the IRS website here.
Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) is a benefit for working people who have an AGI within certain limits. Even if a person does not owe any taxes or is not required to file, the EITC may provide a tax refund. EITC has special rules that apply for members of the military, members of the clergy, and taxpayers with certain types of disability income or children with disabilities.
The maximum amount of credit for tax year 2019 is:
- $6,557 with three or more qualifying children
- $5,828 with two qualifying children
- $3,526 with one qualifying child
- $529 with no qualifying children
If the EITC results in a tax refund, this money can be saved in your ABLE account! You can view these details and learn more about the EITC from the IRS here.
Contributions from a Trust
The ABLE contribution limit is $15,000 for all ABLE programs in 2020. The limit is the same as the annual federal gift tax exclusion defined by the IRS each year. Contributions may be made by the account owner, family, friends, or a special needs or pooled trust, and are not considered taxable income for the ABLE account owner.
Special needs trusts and pooled trusts are taxed at a high rate. If you have one of these vehicles, it may be advantageous to transfer funds from these accounts to your ABLE account. Speak to your accountant for more information and to determine if this option would be in your family's best interest.
ABLE to Work Act
A working ABLE account owner can contribute money to an ABLE account over the $15,000 annual limit due to the ABLE to Work Act. The act allows employed ABLE account owners who do not participate in an employer-sponsored retirement plan to make additional contributions (over the $15,000) equal to whichever is the lesser amount: the designated beneficiary's earned income for the tax year or the federal poverty line for a one-person household (for 2020, this amount is $12,490 in the continental U.S.). So an individual could potentially contribute $15,000 + $12,490 = $27,490 into an ABLE account within a calendar year! And remember, all of the earnings on these contributions are tax deferred.
You can learn more about the ABLE to Work Act here, and you can find regulations around ABLE accounts on the ABLE National Resource Center's site here.
If you receive a refund from your taxes this year, those funds can be directly deposited into your ABLE account (just keep in mind not to exceed the annual contribution limit). You can save all or part of your refund into an ABLE account and remember, these funds can be saved for an unlimited amount of time until you need to use them for a qualified disability expense. Use IRS Form 8888 to split your refund for deposit into more than one account, if needed.