On December 16, 2014 the Senate passes H.R. 5771 that extends many of the tax provisions that expired at the end of 2013. I wrote about the tax extenders 2014 bill when the House passed it and you can get the details here.
The bill also includes the ABLE Act – Achieving a Better Life Experience. The ABLE Act creates tax-favored savings accounts for people with disabilities. ABLE is similar to the college education accounts commonly known as 529 plans, 529 being the Internal Revenue Code Section that established the education plans. Congress added ABLE as Section 529A signifying the similarity.
Like 529 education plans, contributions to ABLE accounts are not deductible. Similar to education plans, ABLE distributions are not taxable as long as the proceeds are used for qualified medical expenses, education, housing and transportation. Penalties and income taxes apply to non-qualified distributions. There can be only one ABLE account per disabled person so family and friends need to coordinate their giving. The annual contribution limit is the same as the annual gift limit – currently $14,000. There are penalties for excess contributions so families and friends should coordinate contributions. Hopefully, the custodian (bank, credit union, investment firm, etc.) of the ABLE account will also track contributions to avoid excess contributions but in the end the taxpayer is responsible.
Also similar to 529 education plans, the beneficiary or others on their behalf have limited investment discretion. Investments can only be changed twice a year unlike IRAs where the investments can be changed daily or even more frequently. States are given the responsibility of creating and maintaining the ABLE programs.
The president is expected to sign the bill and the IRS should have enough time to reprogram their computers so that tax season is not delayed.
Some other resources:
CCH Summary of the bill (PDF)
The actual bill (PDF)