People with Disabilities Can Use ABLE Account Tax Relief for Housing | pennyhoarder
Americans with disabilities face many financial barriers, and the high cost of medical care may be the most significant.
But when people with disabilities need access to assistance programs to pay for such medical care, there are often asset tests that limit the amount they are allowed to have in savings. And sometimes even the amount they are allowed to earn.
This article will showcase one of those rare silver linings in disability funding. We’ll show how to use an ABLE account to make housing expenses deductible on tax returns in states that allow this deduction. The money saved can be used for medical bills or any other expense.
How to Reduce Your State’s Tax Burden By Paying Rent
The main purpose of an ABLE account is to help qualified individuals circumvent these asset tests. Money saved in an ABLE account cannot be charged to persons with disabilities when applying for SSI, Medicaid, or a number of other social programs, as long as the balance is less than $100,000.
In addition to the benefits of protecting your assets, ABLE accounts also offer great tax benefits. As long as the money is used for qualifying expenses, you won’t pay any tax on accrued interest. And in some states, your contributions are even tax-deductible.
An ABLE account can be opened at any age. However, the claimant must be 26 years of age or younger at the onset of their disability to be eligible.
Another thing that sets ABLE accounts apart is that one of their eligible expenses is housing costs. Even an additional needs trust cannot be used to pay housing costs, so this is a big deal.
This allows you to strategize your contributions and expenses to pay things like your rent or your mortgage. In some states, these contributions will be 100% deductible on your tax returns.
Let’s run the math
Pennsylvania is one of two states – the other is Mississippi – that provides a dollar-for-dollar deduction for contributions to an ABLE account, so we’re using guidelines for this example. Let’s say you make $40,000/year and pay $1,100 a month in rent as a resident of Pennsylvania. This represents $13,200/year in housing expenses.
Rather than paying your rent into your current account, you transfer your rent money to your ABLE account. This represents $13,200 in annual contributions to your ABLE account. You keep the money in the checking account portion of the ABLE account rather than using your account as an investment vehicle. Each month, you write your rent check with the checkbook provided for your ABLE account.
You should also remember that there are fees associated with the ABLE account. First, your checkbook will cost $6 in Pennsylvania. You will need to fund your account with at least an additional $11.25 each quarter to cover account maintenance fees. Since you are not investing, you will not have to pay any investment costs.
In total, your contributions to the ABLE account are $13,251. When you file your taxes the following year, your taxable income will decrease by the same amount, from $40,000 to $26,749. Currently, income tax rates in Pennsylvania are 3.07%. This means that your tax owing would go from $1,228 to $821.
How much did you save?
You paid $51 in ABLE fees, but saved $407 on your taxes. That makes your total overall savings of $356/year. The higher your rent, the more you will save per year, simply by paying into your ABLE account rather than your checking account.
This calculation is only valid for the state of Pennsylvania. Since different states have different tax rates and ABLE account fees, you’ll want to do your own savings calculations before implementing this strategy.
Will it help me save money on federal income taxes?
Yes and no. You cannot deduct contributions to an ABLE account on your federal tax return.
But contributions to an ABLE account are currently eligible for saver credit. The maximum savings credit is $1,000 for an individual, but this maximum varies depending on your adjusted gross income (AGI).
The saver’s credit is not refundable. This means it will reduce your tax burden dollar for dollar until you reach $0. If you owe $1,800 in federal taxes, the maximum savings credit would bring that total down to $800. But if you owe $0 in federal tax, the savings credit won’t do anything for you. It is not refundable.
In our tenant example from Pennsylvania, we’ll assume that you are self-employed and owe more than $1,000 in federal income tax. Based on your AGI and the amount you contributed to your ABLE account, you hypothetically qualify for the full $1,000 credit.
Your state tax savings were $356, plus an additional $1,000 on your federal taxes through the Saver’s Credit, meaning this method saved you $1,356/year.
What if my housing costs exceed $16,000 per year?
The standard contribution limit for an ABLE account is currently $16,000 per year, which means gross contributions will only cover on average about $1,333 per month for rent or mortgage payments. So even if you use this strategy, you may not be able to pay 100% of your accommodation costs with your ABLE account.
If you’re disabled and have a job, however, you can contribute beyond the $16,000 limit thanks to the ABLE to Work Act, which was passed in 2017. As long as you don’t have a 401(k , 403(b), or other defined contribution plan through your employer, you can contribute 100% of your earnings to your ABLE account up to a set maximum.
The maximum you can contribute depends on your state, and the numbers vary from year to year. Here are the maximum limits for 2022:
- Alaska: $16,990 maximum in addition to the initial $16,000, for a grand total of $32,990.
- Hawaii: $15,630 maximum in addition to the initial $16,000, for a grand total of $31,630.
- Contiguous United States States: $13,590 maximum in addition to the initial $16,000, for a grand total of $29,590.
ABLE to Work makes it easy to cover all your housing costs through your ABLE account, but in reality you can also use your ABLE account to pay for other additional expenses. You can even invest the money in your ABLE account to fund things like college or retirement.
Even if you use the money for other eligible non-housing expenses, the contributions are all that counts for those specific deductions and tax credits.
Which states allow this tax strategy?
Not all states offer a state tax deduction for contributions to an ABLE account. In fact, only two states allow you to deduct 100% of your ABLE account contributions on your state taxes: Mississippi and Pennsylvania.
However, a number of states allow limited deductions on your tax return. (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no income tax.)
- Arkansas: up to $5,000, or $10,000 if married and filing jointly.
- Illinois: up to $10,000, or $20,000 if married and filing jointly.
- Kansas: up to $3,000, or $6,000 if married and filing jointly.
- Maryland: Up to $2,500, or $5,000 if married and filing jointly.
- Michigan: up to $5,000, or $10,000 if married and filing jointly.
- Nebraska: Up to $10,000, but only $5,000 if married and filing separately.
Is it worth using an ABLE account to pay for my housing expenses?
Even if you aren’t concerned about asset testing, using an ABLE account can provide you with significant tax deductions depending on where you live and can help you qualify for the Federal Savings Credit. These deductions and credits can add up to hundreds of dollars per year and can sometimes even exceed $1,000, even after taking into account ABLE maintenance fees.
As people who pinch every penny, we’d say it’s worth it.
Brynne Conroy, a Pittsburgh-based writer, is the founder of the blog Femme Frugality and the author of “The Feminist Financial Handbook.” She is a regular contributor to The Penny Hoarder.
This was originally published on The Penny Hoarder, a personal finance website that empowers millions of readers across the country to make smart decisions with their money with practical, inspirational advice, and resources on how to to earn, save and manage money.