The Tax Cuts and Jobs Act passed by Congress and signed by President Trump on December 22, 2017 (“the Act”) contains many new federal tax provisions. In this article, I explain how the new tax laws affect seniors and individuals with special needs.
How Does the New Tax Law Affect ABLE Accounts?
An ABLE account allows family members to save funds for the care of a disabled individual without jeopardizing the individual’s eligibility for government programs. ABLE accounts operate in much the same manner as 529 College Savings Plans. Any person may contribute to an ABLE account on behalf of the eligible individual. They become completed gifts once made. Earnings on contributions to ABLE accounts are not taxable income for either the person who made the contribution or the eligible beneficiary.
The Connecticut State Treasurer announced in October, 2017, that Connecticut will partner with the State of Oregon to create its ABLE account. Until Connecticut has its own ABLE accounts, Connecticut residents can open ABLE accounts sponsored by any other state. You can compare the requirements and characteristics of each state’s ABLE account at www.ablenrc.org .
To be eligible to receive funds from an ABLE account, the beneficiary must have a disability that occurred before age 26 and be either 1) entitled to Supplemental Security Income (SSI) benefits or Social Security disability benefits or 2) provide a qualified disability certification.
Distributions from ABLE accounts do not count toward Medicaid eligibility. Note that contributions to and distributions from an ABLE account are also not counted toward other federal assistance programs such as Temporary Family Assistance, Low-Income Home Energy Assistance Program, and need-based institutional aid grants offered by state colleges and universities.
Under the Supplemental Security Income (SSI) program run by the Social Security Administration, needy individuals can receive $750/month in cash assistance. An ABLE Account and its earnings are not counted as income or assets for purposes of SSI. The same is true for Special Needs Trusts which is another way to set money aside for a disabled individual. The major advantage of ABLE accounts over Special Needs Trusts is that they cover housing expenses such as mortgage payments, property taxes, rent, heating fuel, electricity, water and sewer.
ABLE Accounts suffer from a serious limitation. Only one ABLE account is allowed per individual and only an amount up to the annual gift exclusion ($15,000 in 2018) can be contributed each year. Congress recognized this limitation and sought to expand the utility of ABLE Accounts in the new tax law. Beginning in 2018, in addition to the $15,000 contribution, employed beneficiaries can contribute up to the federal poverty level for income ($12,060 in 2018) to their ABLE account. The beneficiary must earn compensation up to the amount contributed and the beneficiary cannot be covered by a retirement plan through work. This provision expires in 2026 like all of the other individual tax cuts.
The new tax law also allows a beneficiary of a college savings plan (i.e. – a 529 plan) to roll over a 529 plan balance to an ABLE account for the beneficiary or a member of his or her family (e.g. - spouse, child, brother, sister, niece, nephew and first cousins). The rollover cannot exceed the $15,000 annual limit from all contributions. Thus, before rolling over a 529 plan balance to an ABLE account, the 529 plan beneficiary must know how much has already been contributed to the ABLE Account for the intended beneficiary. Staggering the rollover to cover 2 separate tax years may make sense.
The Personal Exemption Retained for Qualified Disability Trusts
In 2017, each person who filed or was claimed on a tax return received a personal exemption of $4,050. Under the new tax law, that personal exemption was changed to zero. Congress, however, did not change the personal exemption for a trust ($100 for complex trusts; $300 for simple trusts paying out all income) in the new tax law. Qualified Disability Trusts also remain intact. Third-Party Supplemental Needs Trusts also qualify under the new tax code. However, self-settled Special Needs Trust usually do not qualify for such an exemption because they are grantor trusts for income tax purposes. Third-Party Supplemental Needs Trusts will receive a $4,150 exemption in 2018.
Changes to the “Kiddie Tax” Under the New Tax Law
If a child under the age of 19 or a child under the age of 24 attending school full-time receives unearned income (e.g. – income from dividends, interest or capital gains, or income from a trust or Uniform Transfers to Minors Act (UTMA) account), they must pay tax on that income. In 2017, that income is shown on the parent’s return so the income was taxed at the parents’ highest rate.
Starting in 2018, the tax rate of the child’s parent no longer matters. Under the new tax law, unearned income of a child will be taxed at the rate paid by trusts and estates. Parents didn’t pay the top rate of 37% unless their taxable income exceeded $600,000. Trusts and estates, on the other hand, pay the top tax rate of 37% if their taxable income exceeds only $12,500. Thus, a child receiving investment income will pay much higher taxes on that money than their parents would pay. This change in tax rates could have a major affect on Special Needs Trusts with large principal balances.
It will be interesting to see if the IRS comes out with a separate tax return for children with unearned income that is subject to the kiddie tax. The change in tax rates only applies from 2018 to 2025. Unless Congress changes the tax code before then, the tax on a child’s income will once again appear on the parents’ return starting in 2026.
How the 2017 Tax Law Affects the Election to Take the Standard Deduction vs. Itemizing Deductions
Seniors will need to consider the value of simplifying their returns by claiming a standard deduction instead of itemized deductions. For single filers, the standard deduction has increased from $6,350 in 2017 to $12,000 for tax years 2018 to 2025. For married couples filing jointly, the standard deduction increased from $12,700 in 2017 to $24,000 for tax years 2018 to 2025.
A large standard deduction could simplify income tax returns for many seniors. The deduction for state and local taxes on real estate, motor vehicles, and income cannot exceed $10,000. For senior couples in Connecticut, the “SALT limitation” as its called could make the standard deduction especially attractive. Mortgage interest and charitable deductions remain deductible but miscellaneous expense deductions for tax preparation, legal fees and investment management fees no longer exist.
Yet, for some seniors, itemized deductions could still exceed the standard deduction. The new tax law lowers the threshold for medical expense deductions to 7.5% of adjusted gross income for tax years 2017 and 2018. In 2019 and beyond, medical expenses can only be deducted if they exceed 10% of adjusted gross income.
These provisions only touch the surface of the numerous changes to the federal tax law. For more on the Act, see Ten Things to Know About the New Tax Law.
