Tax Benefit for People with Disabilities; The IRS Has Increased Limit for ABLE Accounts

As we usher into the midway point of 2023, there's been a significant change in tax policy  in favor of ABLE account owners which if you don’t know ABLE accounts are tax-advantaged savings accounts for people with disabilities (Link). With the current rules set in place, people with disabilities can now save more money in their ABLE accounts without jeopardizing their qualifications for government benefits. 

According to the Internal Revenue Service, starting January 2023, the federal gift tax exclusion will be increased from $15,000 to $16,000 annually. And since the deposit limit for the ABLE accounts is tied to this metric, it will also be increased. 

According to the IRS, this current rise in the allowable ABLE account contribution is a result of the looming inflation. With that said, this article will discuss everything you'd like to know about ABLE accounts and how people with disabilities can benefit from this new limit increase. 

So, what are ABLE Accounts? 

The Stephen Beck Jr. Achieving a Better Life Experience ACT was signed into law in 2014. That resulted in the creation of ABLE accounts for people with disabilities and their families. The account owner is usually the beneficiary, and any income generated through that account is not subject to tax. 

For that reason, anyone who wants to contribute to the ABLE account, whether family, friends, or the owner, must do so with post-taxed dollars. However, contributions to ABLE accounts may be eligible to tax in some states. 

ABLE accounts were created to help people with disabilities save and invest for their current expenses and future needs. That includes housing, transportation, education, and legal costs without being disqualified from receiving Medicaid and Supplemental Security Income.

Updated Limit Laws for ABLE Accounts Gift Tax Exclusion 

The total contributions made by all beneficiaries of ABLE accounts in one tax year have been increased from $16,000 to $17,000. However, this sum can be increased or decreased each year to reflect the current state of inflation.

The maximum gift that can be given to another person under the terms of the current tax code without having to notify the IRS in order to qualify for tax-free gifts is $17,000. The owner of the ABLE account may also contribute an additional $13,590 from their own earnings, giving you a maximum annual contribution of $30,590 in most states.

Over time, the maximum cumulative contributions that a person may make to ABLE accounts will largely depend on the state where the account owner resides and the state's cap on 529 tax-advantaged savings accounts for educational purposes. This cap has been set at more than $300,000 per plan in the majority of US states.

Those with disabilities who still receive Supplemental Security Income, however, might face additional restrictions. For instance, the SSI resource limit does not apply to the first $100,000 deposited in their ABLE accounts. The beneficiary's Supplemental Security Income cash benefit is suspended if the beneficiary's ABLE account balance is greater than $100,000.

The good thing is that this doesn't affect a recipient's eligibility for Medicaid medical assistance. Medicaid is retained despite the amount in the accounts. In the event of the beneficiary's death, the state in which an ABLE account's beneficiary lived has the right to file a claim for all or a portion of the funds in the account equal to the amount the state spent on the beneficiary through the state's Medicaid program. 

This is what's known as the Medicaid Pay-Back provision. This claim could recoup all Medicaid-related expenses since the account was opened. 

In Summary 

Interestingly, according to statistics shared by ISS Market- an Intelligence, Financial research, and analytics firm, by the end of 2022, there were precisely 134,000 ABLE accounts holding over $1.18 billion in assets. This shows that, indeed, ABLE accounts are providing a safe place for people with disabilities to save money.