If you have a family member who’s disabled, you likely know that financial and estate planning can be tricky. You don’t want to jeopardize his or her eligibility for means-tested government benefits such as Medicaid or Supplemental Security Income (SSI). A special needs trust (SNT) is one option to consider. Another is to open a Section 520A account, often referred to as an ABLE account, because it was created by the Achieving a Better Life Experience (ABLE) Act.
ABCs of an ABLE account
The ABLE Act allows family members and others to make nondeductible cash contributions to a qualified beneficiary’s ABLE account, with total annual contributions limited to the federal gift tax annual exclusion amount (currently, $15,000). To qualify, a beneficiary must have become blind or disabled before age 26.
The account grows tax-free, and earnings may be withdrawn tax-free provided they’re used to pay “qualified disability expenses.” These include health care, education, housing, transportation, employment training, assistive technology, personal support services, financial management and legal expenses.
An ABLE account generally won’t affect the beneficiary’s eligibility for Medicaid and SSI — which limits a recipient’s “countable assets” to $2,000 — with a couple of exceptions. First, distributions from an ABLE account used to pay housing expenses are countable assets. Second, if an ABLE account’s balance grows beyond $100,000, the beneficiary’s eligibility for SSI is suspended until the balance is brought below that threshold.
ABLE vs. SNT
Here’s a quick review of the relative advantages and disadvantages of ABLE accounts and SNTs:
Availability. Anyone can establish an SNT, but ABLE accounts are available only if your home state offers them, or contracts with another state to make them available. Also, as previously noted, ABLE account beneficiaries must have become blind or disabled before age 26. There’s no age limit for SNTs.
Qualified expenses. ABLE accounts may be used to pay only specified types of expenses. SNTs may be used for any expenses the government doesn’t pay for, including “quality-of-life” expenses, such as travel, recreation, hobbies and entertainment.
Tax treatment. An ABLE account’s earnings and qualified distributions are tax-free. An SNT’s earnings are taxable.
Contribution limits. Annual contributions to ABLE accounts currently are limited to $15,000, and total contributions are effectively limited to $100,000 to avoid suspension of SSI benefits. There are no limits on contributions to SNTs, although contributions that exceed $15,000 per year may have gift tax implications.
Investments. Contributions to ABLE accounts are limited to cash, and the beneficiary (or his or her representative) may direct the investment of the account funds twice a year. With an SNT, you can contribute a variety of assets, including cash, stock or real estate. And the trustee — preferably an experienced professional fiduciary — has complete flexibility to direct the trust’s investments.
Examine the differences
When considering which option is best for your family (or whether you should have both), remember the key differences: An ABLE account may offer greater tax advantages, while an SNT may offer greater flexibility. We can help answer any questions.
© 2020 Covenant CPA
Many taxpayers make charitable gifts — because they’re generous and they want to save money on their federal tax bills. But with the tax law changes that went into effect a couple years ago and the many rules that apply to charitable deductions, you may no longer get a tax break for your generosity.
Are you going to itemize?
The Tax Cuts and Jobs Act (TCJA), signed into law in 2017, didn’t put new limits on or suspend the charitable deduction, like it did with many other itemized deductions. Nevertheless, it reduces or eliminates the tax benefits of charitable giving for many taxpayers.
Itemizing saves tax only if itemized deductions exceed the standard deduction. Through 2025, the TCJA significantly increases the standard deduction. For 2020, it is $24,800 for married couples filing jointly (up from $24,400 for 2019), $18,650 for heads of households (up from $18,350 for 2019), and $12,400 for singles and married couples filing separately (up from $12,200 for 2019).
Back in 2017, these amounts were $12,700, $9,350, $6,350 respectively. The much higher standard deduction combined with limits or suspensions on some common itemized deductions means you may no longer have enough itemized deductions to exceed the standard deduction. And if that’s the case, your charitable donations won’t save you tax.
To find out if you get a tax break for your generosity, add up potential itemized deductions for the year. If the total is less than your standard deduction, your charitable donations won’t provide a tax benefit.
You might, however, be able to preserve your charitable deduction by “bunching” donations into alternating years. This can allow you to exceed the standard deduction and claim a charitable deduction (and other itemized deductions) every other year.
What is the donation deadline?
To be deductible on your 2019 return, a charitable gift must have been made by December 31, 2019. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” The delivery date depends in part on what you donate and how you donate it. For example, for a check, the delivery date is the date you mailed it. For a credit card donation, it’s the date you make the charge.
Are there other requirements?
If you do meet the rules for itemizing, there are still other requirements. To be deductible, a donation must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions.
And there are substantiation rules to prove you made a charitable gift. For a contribution of cash, check, or other monetary gift, regardless of amount, you must maintain a bank record or a written communication from the organization you donated to that shows its name, plus the date and amount of the contribution. If you make a charitable contribution by text message, a bill from your cell provider containing the required information is an acceptable substantiation. Any other type of written record, such as a log of contributions, isn’t sufficient.
Do you have questions?
We can answer any questions you may have about the deductibility of charitable gifts or changes to the standard deduction and itemized deductions.
© 2020 Covenant CPA
A variety of tax-related limits affecting businesses are annually indexed for inflation, and many have gone up for 2019. Here’s a look at some that may affect you and your business.
- Section 179 expensing:
- Limit: $1.02 million (up from $1 million)
- Phaseout: $2.55 million (up from $2.5 million)
- Income-based phase-ins for certain limits on the Sec. 199A qualified business income deduction:
- Married filing jointly: $321,400-$421,400 (up from $315,000-$415,000)
- Married filing separately: $160,725-$210,725 (up from $157,500-$207,500)
- Other filers: $160,700-$210,700 (up from $157,500-$207,500)
- Employee contributions to 401(k) plans: $19,000 (up from $18,500)
- Catch-up contributions to 401(k) plans: $6,000 (no change)
- Employee contributions to SIMPLEs: $13,000 (up from $12,500)
- Catch-up contributions to SIMPLEs: $3,000 (no change)
- Combined employer/employee contributions to defined contribution plans (not including catch-ups): $56,000 (up from $55,000)
- Maximum compensation used to determine contributions: $280,000 (up from $275,000)
- Annual benefit for defined benefit plans: $225,000 (up from $220,000)
- Compensation defining “highly compensated employee”: $125,000 (up from $120,000)
- Compensation defining “key employee”: $180,000 (up from $175,000)
Other employee benefits
- Qualified transportation fringe-benefits employee income exclusion: $265 per month (up from $260)
- Health Savings Account contributions:
- Individual coverage: $3,500 (up from $3,450)
- Family coverage: $7,000 (up from $6,900)
- Catch-up contribution: $1,000 (no change)
- Flexible Spending Account contributions:
- Health care: $2,700 (up from $2,650)
- Dependent care: $5,000 (no change)
Additional rules apply to these limits, and they are only some of the limits that may affect your business. Please contact us for more information at 205-345-9898.
© 2019 Covenant CPA