In light of passage of the Tax Cuts and Jobs Act into law late December, let’s take a look at ABLE Accounts, which are accounts created in 2014 and are for special needs children.
Before the ABLE Account existed, the only savings vehicle available to parents with special needs children was a Special Needs Trust (SNT). The problem with SNT was that when the special needs child became an adult and applied for disability, the amount in the SNT was held against the child, lowering the amount of disability income that the child would receive. ABLE Accounts are not held against the child when they apply for disability.
The new tax law, though, has made ABLE Accounts even better for certain families.
You can put up to the gift tax limits, which is $15,000 in 2018. Or, if you are married and you and your wife elect to split your gifts, you can contribute $30,000 in 2018. However, the big change with these accounts is that you can take the proceeds in a Section 529 account and roll them into an ABLE, or vice versa.
Section 529 accounts are tax advantaged educational accounts. You can contribute up to the gift tax limits into these accounts, and they grow tax free. When money is taken out of the 529, it is tax free as long as the funds are being used for educational expenses, books, computers and lodging for students.
Section 529 accounts are owned by the person who set up the account, and the child is the beneficiary. The good part of that arrangement is the child doesn’t have access to a bunch of cash when they are 18 years old, and the parent directs where the money goes, not the child.
The question has always been, what happens if the child doesn’t go to college or private school? The amount in the 529 could be rolled into another 529 for a sibling or even a first cousin. The new tax law allows the proceeds in a 529 plan to be transferred to an ABLE Account tax free. Further, the new tax law allows the money in an ABLE Account to be transferred to a 529 account tax free.
It’s not uncommon today for a child not to go to college. In fact, most of the world’s successful CEOs are college dropouts, or didn’t even go to college. So, there is a whole generation of children growing up, thinking that college is a waste of time. However, if you have saved money for college for the child and they don’t go to college, then the money in the 529 account, when withdrawn, would be taxable to the parent who owns the account.
Now, if one child doesn’t go to college, and you have a special needs child, then you can roll the amount over to an ABLE tax free. If you started an ABLE for a special needs child when they were created four years ago, and if the child has shown signs of improvement, then you can also roll over the amount in the ABLE to a 529 Plan.
If you are self-employed you can put more money into an ABLE or 529 by paying your child a salary. You can pay your child up to $12,000 (the limit for the single standard deduction) and make the amount tax deductible. Better yet, the child doesn’t need to file a tax return. On top of the salary paid to the child, you can still put up to the gift tax limits into the account, effectively putting $27,000 into these accounts per year, or $42,000 if you are married and elect to split your gifts.
These accounts, as you can see can be very powerful — both for a student and for someone with special needs. With an ABLE account, you can rest assured that your special needs son or daughter is taken care of, and they can still get the full amount of disability when they turn 18 years old.
With a Section 529 plan, it is a smart way to save for college. And if college isn’t in one of your kid’s plans, you can roll over the amount that you have saved for your child into an ABLE for your special needs child. If your special needs child has money in an ABLE account, and it’s no longer needed, then you can roll over the amount in the ABLE account into a 529.
Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as...