President Barack Obama recently signed the Achieving a Better Life Experience Act (ABLE Act). The ABLE Act allows individuals and families to open tax-free savings accounts to save for long-term needs associated with an individual’s disability.
These accounts are modeled after 529 college savings accounts. To qualify, a person must be diagnosed with a disability resulting in “marked and severe functional limitations” by the age of 26. An account can be established for an individual without jeopardizing that person’s eligibility for federal programs such as Medicaid. The funds saved in these accounts can be used for a variety of expenses including transportation, housing, employment support and health care.
Like 529 plans, earnings in these accounts grow tax-free, but contributions are made with after-tax dollars. Accounts can be set up at financial institutions and the annual contribution limit is $14,000. ABLE accounts are allowed to accrue up to $100,000 in savings without affecting a person’s eligibility for government aid such as Social Security. This is a great improvement for ABLE account holders over the current asset limit of $2,000. Medicaid coverage would continue no matter how much money is in the accounts.
These accounts can be a useful planning tool for those living with or caring for someone with a physical or developmental disability.
2014 was the first year Americans had access to health insurance options through the Affordable Care Act (the “ACA”). With this new access to insurance came the obligation to purchase it or face new tax consequences. If you opted not to buy health insurance in 2014, you may be faced with a penalty when you file your 2014 tax returns. Even if you did buy insurance through one of the insurance marketplaces, you may have new tax forms to complete and some surprises when it comes to your refund or tax bill.
For most taxpayers, the impact on their tax filing will be minimal, requiring those who were covered to simply check a box indicating they had insurance throughout the year. Those who received subsidies to purchase insurance and who later had increases in their 2014 salary may be required to pay back some of that subsidy. Those whose salary decreased may receive a larger than expected refund.
As these provisions are new to everyone, there may be confusion for taxpayers and tax preparers alike. Unfortunately, due to recent budget cuts, the IRS expects to be able to speak with only half of the people who call in for assistance.
While gearing up for the 2014 tax season, it’s helpful to understand some the most important provisions of the ACA:
1. Exemptions: The ACA provided some exemptions that allow taxpayers to opt out of purchasing insurance without any penalties, including hardship, affordability and religion. There are different methods for applying for an exemption depending on the type of exemption you are requesting. To learn more, go to: https://www.healthcare.gov/fees-exemptions/apply-for-exemption/
2. Penalties: Those who do not qualify for an exemption, were insured for only part of the year, or remain uninsured will be required to pay a penalty called “The Individual Shared Responsibility Payment.” The penalty is set to increase over the coming years, so compare not to see if it is more beneficial for you to pay the penalty or buy insurance. The Tax Policy Center has designed a calculator to help you determine your penalty is you opt to remain uninsured: http://taxpolicycenter.org/taxfacts/acacalculator.cfm.
3. Reconciling: Those who purchased subsidized insurance on the exchanges received an advance on a tax credit. At the time of requesting the subsidy for insurance in 2014, the amount of the subsidy was calculated based on the taxpayer’s 2012 income. The amount of the subsidy granted will be reconciled in the taxpayer’s 2014 filing using the taxpayer’s actual 2014 income and that will affect the taxpayer’s refund or bill. Changes in an individual’s personal circumstances, such as divorce, marriage or a new child can also impact those numbers.
There’s still time to plan. Taxpayers facing a loss in premium subsidies because of an increase in income can reduce their income to qualify for the credits. For example, they can contribute to an IRA by April 15, 2015, for the 2014 tax year.