Somewhat obscured by the Congress’ passing of the “Tax Increase Prevention Act of 2014,” better known as the tax extenders legislation, was another bill passed by Congress and expected to be signed by the President this week. The Achieving a Better Life Experience Act of 2014, establishes “ABLE” accounts for disabled persons. These accounts basically function similar to a Sec. 529 Qualified Tuition Plan (QTP).
Following the procedures for a QTP, ABLE accounts are established and maintained by the individual states. Persons residing in a state with no ABLE program may participate in a program maintained by a “contracting” state. An individual is limited to one account, and there can only be one beneficiary for each account. In order to qualify for an account, the individual must be entitled to benefits based on blindness or disability under the Social Security disability insurance program or provide a disability certification to the IRS for the tax year in question. The existence of an ABLE account will have no effect on Medicaid eligibility.
Cash contributions only can be made to an ABLE account. Contributions are not deductible for income tax purposes, but the funds grow tax-free when used for qualified disability expenditures. The annual limit on contributions is the amount of the annual gift tax exclusion. This amount is $14,000 for 2015.
When funds are distributed from the ABLE account for qualified medical expenses, the money is not subject to taxation. Qualified disability expenses include:
• Education
• Housing
• Transportation
• Employment training and support
• Assistive technology and personal support services
• Health, prevention and wellness
• Financial management and administrative services
• Legal fees
• Expenses for oversight and monitoring
• Funeral and burial expenses, and
• Other expenses approved by the IRS.
If distributions exceed the qualified disability expenses, the taxable amount will be based on the ratio of contributions to income in the account. In addition there will be a 10% penalty on the taxable portion. Upon the death of the eligible individual, any amounts in that account (after Medicaid reimbursements) would go the deceased estate or to a designated beneficiary, subject to income tax on the investment earnings but no penalty.
Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.
Dr. Stancil has written for the Polk County Business Journal and has presented a number of papers at academic conferences. He wrote the Instructor’s Manual for the 13th edition of Horngren’s Cost Accounting. He is published in the Global Sustainability as a Business Imperative, Green Issues and Debates, The Encyclopedia of Business in Today’s World, The Palmetto Business Review, The CPA Journal, and in the NATP TaxPro Journal. His paper, “Building Sustainability into the Tax Code” was recognized as the outstanding accounting paper at the annual meeting of the South East InfORMS. He wrote a book entitled “Tax Issues Faced by U. S. Missionary Personnel Abroad ” that will soon be published.
He has recently launched a new endeavor, Church Tax Solutions, which presents online, on demand seminars on various church and clergy tax issues.
1 comment on “Achieving A Better Life Experience (ABLE) Accounts Established By Congress”
Congratulations to the disabilities community of the US on the ABLE Act which will give your disabled the same type of disability account as we have in Canada – our Registered Disability Savings Plan (RDSP).
How odd that Senator Chuck Schumer announced this several months ago. He is one of the biggest supporters of FATCA, the very thing that makes my Canadian-born son’s Registered Disability Savings Plan of no worth to my son, as he is deemed by the US a “US Citizen” though born in Canada, never registered with the US, never lived in the US, never had any benefit from the US.
Likely your ABLE Act is modeled somewhat on what the Canadian government has offered to its disabled population since 2008.
The RDSP is a disability account in which Canadians are encouraged to save for themselves or their family member(s) with a disability – to assist in paying for future expenses that generally exceed those for Canadians without such disabilities. It is an investment savings, for which the Government of Canada matches bonds and grants to what the Holder of the Plan contributes – so is partially Canadian-taxpayer funded. US tax (US$ 3,661) has been paid by me on this particular account for which I am the Holder (for my son’s benefit) as follows:
1. IF THE SPONSOR OF AN RDSP IS A US PERSON, then (US person analysis of the beneficiary is irrelevant):
a. THE INCOME GENERATED BY THE RDSP IS TAXED TO THE US PERSON SPONSOR currently as it is earned;
b. The grant is taxed to the US person sponsor when it is distributed to the beneficiary;
c. US person sponsor must file 3520A annually;
d. US person sponsor must file 3520 annually.
2. If the sponsor of a RDSP (or RESP – Registered Education Savings Plan which works the same way) is NOT a US person, AND the beneficiary is a US person then:
a. The income generated by the RDSP (RESP) is taxed to the US beneficiary currently as it is earned
b. The grant is taxed to the US person beneficiary when it is distributed
c. US person beneficiary must file 3520 annually (no 3520A)
Neither RDSPs nor RESPs are covered by the US/Canada Tax Treaty.
Funds that came from the Canadian taxpayer meant for benefit to
Canadians with disability, thus, end up in the hands of the US IRS. In the same manner, the RESP (Registered Education Savings Plan) also has a Canada Education Savings Grant component that is contributed by the Canadian taxpayer and which is taxed by the US government even though the US has absolutely no involvement in this.
Any US claims to tax these accounts is baseless. Nor should or does the US have any right to be the one to decide what tax advantageous arrangements a nonresident can participate in under another government’s tax regimen.
As another expat asked, “Another US spending program financed with Canadian money?”
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