34.1 Senior Citizens Get Certain Filing Breaks

The following special tax rules favor senior citizens:

• Higher filing thresholds. If you are single and age 65 or older on or before January 1, 2017, you do not have to file a 2016 return unless your gross income is $11,900 or over. This is $1,550 more than for younger taxpayers. If you are married and you and your spouse are both age 65 or older, a joint return does not have to be filed unless your gross income is $23,200 or over, or $21,950 or over if only one of you is age 65 or older; see the chart on page 3 for further details.
• Higher standard deduction. If you are age 65 or older on or before January 1, 2017, you receive an additional standard deduction allowance if you do not itemize deductions. If you are single you get an additional $1,550 on your 2016 return, or $1,250 if you are married or a qualifying widow/widower (13.4). Your 2016 standard deduction is $7,850 if you are single. If married filing jointly, it is $13,850 if one of you is age 65 or over, or $15,100 if both of you are (13.4).
• Social Security benefits may be exempt from tax. The taxable portion of your Social Security benefits may vary from year to year because it depends on an amount called “provisional income” (34.3). If you are married and file jointly, none of your net Social Security benefits are taxable if your provisional income is not more than a base amount of $32,000. The base amount is $25,000 if your filing status is single, head of household, qualifying widow/widower, or you are married filing separately and did not live with your spouse at any time during the year. Married persons who file separately and live together at any time during the year are not allowed any base amount; see 34.3 for computing taxable Social Security benefits.
• Tax credit if age 65 or older. This is a limited tax credit for taxpayers age 65 or older who receive little or no Social Security or Railroad Retirement benefits and for individuals under age 65 who are totally disabled with extremely low incomes (34.7). If you are single, or married but only you are eligible, and receive more than $416 each month from Social Security, you may not claim the credit. If you are married and both you and your spouse are eligible for the credit and file a joint return, you may not claim the credit if you receive more than $625 each month from Social Security.

34.2 Social Security Benefits Subject to Tax

If you received or repaid Social Security benefits in 2016, you will receive Form SSA-1099 from the Social Security Administration, showing the total benefits paid to you and any benefits you repaid to the government in 2016. Box 3 of Form SSA-1099 shows the total benefits paid to you in 2016. This may include, in addition to Social Security retirement benefits, survivor and disability benefits, which are subject to the same tax rules as retirement benefits, but not Supplemental Social Security (SSI), which is not taxable. Also included in the Box 3 total are amounts withheld from your benefits for Medicare premiums, workers’ compensation offset, or attorneys’ fees for handling your Social Security claim; these and other withholdings are itemized in the “description” section below Box 3.

The net benefit shown in Box 5 of Form SSA-1099 (benefits paid less benefits repaid) is the benefit amount used to determine the taxable portion of your benefits (if any) (34.3).

Keep Form SSA-1099 for your records; do not attach it to your return.

Railroad Retirement benefits. The portion of your Tier 1 Railroad Retirement benefits that is equivalent to Social Security retirement benefits is subject to the computation for determining taxable benefits (34.3). If any part of your 2016 Tier 1 benefits is equivalent to Social Security benefits, you will receive Form RRB-1099 from the government. The net Social Security Equivalent Benefit shown on Form RRB-1099 is the amount used to determine taxable benefits (34.3). Other Tier 1 Railroad Retirement benefits, as well as Tier 2 benefits, are treated as pension income and not as Social Security benefits for tax purposes.

Benefits paid on behalf of child or incompetent. If a child is entitled to Social Security benefits, such as after the death of a parent, the benefit is considered to be the child’s regardless of who actually receives the payment. Whether the child’s benefit is subject to tax will depend on the amount of the child’s income.

Medicare premiums deducted from benefits. The Medicare premiums deducted from your benefits are included in the total for benefits paid in Box 3 of Form SSA-1099. This includes premiums for Medicare Parts B, C and D. The premiums do not reduce the net benefits in Box 5 used to figure taxable benefits (34.3).

Workers’ compensation. If you are receiving Social Security disability payments and workers’ compensation for the same disability, your Social Security benefits may be reduced by the workers’ compensation. For example, you are entitled to Social Security disability benefits of $12,000 a year. After receiving a $5,000 workers’ compensation award, your disability benefits are reduced to $7,000. For purposes of the computation steps to determine taxability of benefits (34.3), you treat the full $12,000 as Social Security benefits.

In one case, a disabled worker whose Social Security disability benefits were reduced by workers’ compensation argued that since the workers’ compensation payments are tax free (2.13), the portion of Social Security benefits not paid to him because of the workers’ compensation should also be tax free. The Tax Court however agreed with the IRS that for purposes of figuring the tax on benefits (34.3), the specific terms of the tax code include the reduction for workers’ compensation as a Social Security benefit that must be taken into account.

Net benefits. The net benefit shown in Box 5 of Form SSA-1099 is the amount used to determine the taxable portion of your benefits. If Box 5 shows a negative amount (a figure in parentheses), none of your benefits are taxable. If the negative amount is related to Social Security benefits included in gross income in a prior year, you may be entitled to a deduction or a credit; see IRS Publication 915 for further instructions on how to figure the deduction or credit when your repayments exceed your gross benefits.

Taxable Social Security benefits are not considered earnings and therefore may not be the basis of an IRA contribution (8.2), earned income credit (25.6), or foreign earned income exclusion (36.2).

Nonresident aliens. Unless provided otherwise by tax treaty, 85% of a nonresident alien’s Social Security benefits will be subject to the 30% withholding tax imposed on U.S. source income that is not connected with a U.S. trade or business. SeeIRS Publication 915 for further details.

34.3 Computing Taxable Social Security Benefits

The taxable portion of your 2016 benefits depends on your provisional income and your filing status. Part of your net Social Security benefits (Box 5 of Form SSA-1099) will be subject to tax if your provisional income exceeds a base amount of either $25,000 or $32,000. The base amount is $25,000 if your filing status is single, head of household, qualifying widow/widower, or married filing separately and you lived apart from your spouse for all of 2016. The base amount is $32,000 if you are married filing jointly. You are not entitled to any base amount if you are married filing separately and you lived with your spouse at any time during 2016; see the Caution in this section.

To figure provisional income, you will have to increase the total income shown on your return by tax-exempt interest (4.24), by 50% of your net Social Security benefits, and by certain tax-free fringe benefits and exclusions, before subtracting adjustments to income other than the student loan interest deduction (33.13), the tuition and fees deduction (33.12), and the domestic production activities deduction (40.23). By completing Lines 1–8 of Worksheet 34-1, you arrive at provisional income, shown on Line 8.

Taxable amount if your provisional income exceeds the base amount. If your provisional income exceeds your base amount on Line 9 of Worksheet 34-1 ($25,000, $32,000, or 0), some of your benefits are taxable. The taxable portion depends on whether provisional income also exceeds the adjusted base amount. The adjusted base amount is $34,000 if your filing status is single, head of household, qualifying widow/widower, or married filing separately and you lived apart from your spouse for all of 2016. The adjusted base amount is $44,000 if you are married filing jointly. As noted earlier, if you are married filing separately and you live with your spouse at any time during the year, you have a “0” base amount and will have to include the maximum amount of benefits in income; see the Caution in this section.

Rule 1. If your provisional income exceeds the base amount but not the adjusted base amount, the amount of benefits subject to tax is the lesser of (1) 50% of your net benefits (from Box 5 of Form SSA-1099), or (2) 50% of the excess of provisional income over the base amount.

Rule 2. If your provisional income exceeds the adjusted base amount, the taxable part of your benefits is the lesser of:

1. 85% of net benefits (Box 5 of Form SSA-1099), or
2. 85% of the excess of provisional income over the adjusted base amount, plus whichever of these is smaller: (a) $4,500 (single, head of household, qualifying widow/widower, or married filing separately and you lived apart from your spouse all year), or $6,000 (married filing jointly), or (b) 50% of net benefits.

By following the steps of Worksheet 34-1, you will get the amount of taxable benefits under either Rule 1 or Rule 2, whichever is applicable in your case.

IRA contributions. Do not use Worksheet 34-1 if you are an active participant in an employer retirement plan and you plan to make deductible IRA contributions (8.4). You must use the worksheets printed in IRS Publication 590. With the worksheets, you first determine the amount of Social Security benefits that would be subject to tax, assuming you did not claim any IRA deduction. That amount is then used to figure the allowable IRA deduction, taking into account any limitations under the phase- out rules (8.4), and, finally, the allowable IRA deduction is used to compute the taxable portion of your Social Security benefits.

If you are not covered by an employer retirement plan, you may use Worksheet 34-1 to figure the taxable portion of your Social Security benefits.

34.4 Election for Lump-Sum Social Security Benefit Payment

If in 2016 you receive a lump-sum payment of benefits covering prior years, you have a choice as to how to determine the taxable portion of the benefits: (1) You may treat the entire payment as a 2016 benefit taxable under the regular rules (34.3), or (2) you may allocate the benefits between 2016 and the earlier years. Choose the method that provides the lowest required increase to income in the current year. For example, if you receive a 2016 lump-sum payment that includes benefits for 2015, you may find that an allocation of benefits is advantageous where your income over the two-year period has fluctuated and benefits allocated to 2015 would be subject to a lower taxable percentage than if they were treated as 2016 benefits.

When you elect to allocate benefits to a prior year, you do not amend the return for that year. You compute the increase in income (if any) that would have resulted if the Social Security benefits had been received in that year. You then add that amount to the income of the current year.

See IRS Publication 915 for instructions and worksheets for making the allocation and figuring the amount to be reported on your return.

34.5 Retiring on Social Security Benefits

Retirement benefits are not paid automatically. You should file for Social Security retirement benefits three months before you want to start receiving benefits. The age for receiving full Social Security benefits, traditionally 65, was increased for those born after 1937. For those born in 1943–1954, you must be age 66 to receive full benefits; see the Law Alert on this page. Reduced benefits may be elected if you are at least age 62. The reduction for starting benefits early depends on the number of months between the start date and your full Social Security retirement age. For example, if you were born in 1955 and elect benefits at age 62 in 2017, the benefit is 74.2% of what could be claimed at full retirement (age 66 and 2 months). Even though your full Social Security retirement age is over 65, you should register with the Social Security Administration three months before the month in which you turn age 65 to ensure Medicare coverage.

If you were born in 1943 or later and delay benefits beyond full Social Security retirement age of 66, your Social Security benefit increases 8% for each year you delay retirement. The increase for delaying benefits no longer applies once you reach age 70.

Benefits before reaching full retirement age may be reduced because of earnings. If you are under full retirement age and are receiving benefits, $1 of benefits will be deducted for each $2 earned above an annual limit. In 2016, the limit was $15,720 (the 2017 limit will be listed in the e-Supplement at jklasser.com). For the year you reach full retirement age, $1 of benefits is deducted for each $3 earned over a different limit. For example, if in 2016 you reached the full Social Security retirement age of 66, benefits were reduced $1 for every $3 of earnings over $41,880, but only earnings before the month in which you reached age 66 are counted. Starting with the month in which you reach full retirement age, you are entitled to full benefits with no limit on how much you may earn.

There is also a favorable rule for the first year of retirement. A full benefit may be received for any month in which your earnings do not exceed ¹/¹² of the annual limit, even if the yearly limit is exceeded. However, this special rule does not apply for any month in which you are self-employed and devote over 45 hours to the business, or between 15 and 45 hours if your business involves a highly skilled profession.

So long as you continue to work, you pay Social Security taxes on your earnings, regardless of your age, so the additional earnings can increase your benefits. In addition, after you reach full retirement age, you will be given credit for any months in which you did not receive a benefit because of your earnings.

Regardless of your age, you may receive any amount of income from sources other than work—for example, pensions or investments—without affecting the amount of Social Security retirement benefits.

34.6 How Tax on Social Security Reduces Your Earnings

There is an added tax cost of earning income if the earnings will subject your Social Security benefits to tax. Therefore, if your benefits are not currently exposed to tax, you have to figure not only the tax on the extra income but also the amount of Social Security benefits subjected to tax by those earnings. If the additional earnings will put you over the base amount (34.3), then you will not only have to pay tax on the additional earnings but also on the Social Security benefits that will be subject to tax.

34.7 Eligibility for the Credit for the Elderly or the Disabled

The tax credit for the elderly or disabled can be claimed by very few taxpayers. You can qualify for a 2016 credit only if your income is quite low and you meet one of the following conditions:

• Your 65th birthday is on or before January 1, 2017; or
• You were under age 65 at the end of 2016, you retired before the end of 2016 because of permanent and total disability, you received taxable disability income in 2016 from your former employer’s disability plan, and you had not reached mandatory retirement age from the employer plan as of January 1, 2016. Disability income is taxable wages or payments in lieu of wages paid to you while you are absent from work because of permanent and total disability.

You will not be able to claim any credit if your Social Security benefits or adjusted gross income is “too high”, or if you have no tax liability (34.8).

Disabled. You are considered permanently and totally disabled if you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months.

For the first year you claim the credit, you need a physician’s certification of your disability. For later years, new certifications are generally not required.

Married couples. If you are married, the credit generally may be claimed only if you file jointly. However, if you and your spouse live apart at all times during the taxable year, a qualifying spouse may claim the credit on a separate return.

Nonresident aliens. You may not claim the credit if you are a nonresident alien at any time during the year, unless you are married to a citizen or resident and you have elected to be treated as a resident (1.5).

34.8 Figuring the Credit for the Elderly or Disabled

The credit is figured on Schedule R, which you attach to Form 1040 or Form 1040A if any amount is allowed. You may not claim the credit on Form 1040EZ.

The law specifies an initial base amount for figuring the credit. This base amount is reduced by nontaxable Social Security and other tax-free pensions, as well as by adjusted gross income exceeding specific limits. The 15% credit amount applies to the reduced base amount, but the resulting credit is allowed only to the extent it does not exceed your tax liability. These limitations are discussed below.

The initial base amount is:

• $5,000, if you are single, head of household, or are a qualifying widow/widower age 65 or over. If you are under age 65 and retired on permanent and total disability, the base amount is the lower of your taxable disability income or $5,000.
• $5,000, if you file a joint return and only one spouse is eligible for the credit (the eligible spouse is either age 65 or older or under 65 but retired on permanent and total disability).
• $7,500, if you file a joint return and both spouses are 65 or over. The credit is figured solely on this base; a separate computation is not made for each spouse. If one of you is age 65 or over and the other is under age 65 and retired on total disability, the initial base amount is the lesser of (1) $7,500 or (2) $5,000 plus the taxable disability income of the spouse under age 65. If both of you are under age 65 and retired on permanent and total disability, the initial base amount is the lower of your combined taxable disability income or $7,500.
• $3,750, if you are married filing a separate return and you lived apart from your spouse the entire year, and you are either age 65 or older or under 65 but retired on permanent and total disability.

Nontaxable Social Security and pensions reduce the base amount. The base amount is reduced by:

• Social Security and Railroad Retirement benefits that are not taxable (34.3); and
• Tax-free pension, annuity, or disability income paid under a law administered by the Veterans Administration (but not military disability pensions) or under other federal laws.

The base amount is not reduced by military disability pensions received for active service in the armed forces of any country, disability pensions for active service in the National Oceanic and Atmospheric Administration or Public Health Service, certain disability annuities paid under the Foreign Service Act of 1980, and workers’ compensation benefits. However, if Social Security benefits are reduced by workers’ compensation benefits, the amount of workers’ compensation benefits is treated as Social Security benefits that reduce the base.

Excess adjusted gross income reduces the base amount. You reduce the base amount by one-half of adjusted gross income (AGI) exceeding: $7,500 if you are single, head of household, or a qualifying widow/widower; $10,000 if you are married filing a joint return; or $5,000 if you are married, live apart from your spouse for the entire year, and file a separate return. Because of these income reductions, the credit is not available to a single person (or head of household or qualifying widow/widower) when AGI reaches $17,500, $20,000 on a joint return where one spouse is eligible for the credit, $25,000 on a joint return where both spouses are eligible for the credit, and $12,500 where a married person files separately.

15% credit limited by tax liability. After reducing the credit base amount as just discussed for nontaxable Social Security and pensions and excess AGI, the remaining credit base is multiplied by 15%. This is the maximum credit but where this amount exceeds tax liability, the credit is limited to the lesser liability, as in the following Example.

34.9 Tax Effects of Moving to a Continuing Care Facility

Senior citizens who move into “continuing care” or “life-care” facilities pay large upfront entrance fees upon admittance, as well as monthly fees thereafter in return for a residence, meals, and lifetime health care, including long-term skilled nursing care, should that become necessary.

Portion of monthly fees deductible as medical expense. Part of the monthly fees to a life-care community are allocable to health care, which you may deduct as an itemized medical expense subject to the AGI floor (17.1). Continuing care facilities generally send a statement to the residents specifying the portion of their monthly service fees that went towards health care.

The IRS and Tax Court have approved the use of a “percentage method” for allocating the community’s medical expenses among the residents. In general, the annual medical expenses of the community are divided by total operating expenses to get the medical care allocation percentage. In a particular case, the IRS could contest how the allocation is figured or how the allocated amount is divided among the residents.

For example, in a 2004 case (Baker, 122 TC 143), the IRS contested a couple’s medical expense deduction for a portion of the monthly service fees paid for their two-bedroom duplex apartment, categorized as an “independent living unit” (ILU). Using a percentage method computation supplied by the resident council of their continuing care retirement community, the Bakers deducted $6,557 of their 1997 monthly service fees and $9,891 of their 1998 monthly fees as medical expenses. The IRS initially allowed a deduction for $4,488 of the 1997 fees and $5,142 of the 1998 fees using a different percentage method. Then, when the Bakers appealed to the Tax Court, the IRS argued that the deductible part of the service fees should be figured using an “actuarial method,” which would increase the Bakers’ two-year deduction by a few hundred dollars over what the examining agent had allowed.

However, the Tax Court refused to require use of the actuarial method, which requires projections of longevity and lifetime utilization of health-care services, and is so complicated that the IRS could not fully explain the method to the Court. The Court held that the percentage method is appropriate, noting that the IRS has approved use of the percentage method in rulings since 1967. However, in applying the percentage method to determine the Bakers’ deductions, the Court had to resolve disputes over how certain expenses should be treated and how the allocated medical care percentage, once determined, should be split among the residents. For example, the Court held that the community’s interest expenses, depreciation and amortization allowances should be included in both the numerator and denominator when dividing medical costs by operating costs to determine the medical care allocation percentage.

The Court calculated that 27.93% of the community’s 1997 total costs and 30.07% of the 1998 costs were allocable to medical care. The Court then held that the Bakers could not simply multiply these percentages by the fees they paid to get their deductions. The same medical expense amount must be allocated to each ILU resident by multiplying the allocation percentage by a weighted average of the service fees paid each year by the ILU residents. The weighted average annual service fee for 1997 paid by the ILU residents was $13,902, which when multiplied by the allocation percentage of 27.93%, gave a medical care allocation of $3,883 per resident. For 1998, the weighted average annual service fee for ILU residents was $14,093, which when multiplied by the allocation percentage of 30.07%, gave a medical care allocation of $4,238 per resident. On their joint returns, the Bakers could treat double the per resident amounts as medical expenses; that is, $7,766 for 1997 and $8,476 for 1998.

Portion of nonrefundable entrance fee deductible as medical expense. What about the upfront payments required by life-care communities? If an entrance fee or founder’s fee for lifetime care is nonrefundable, part may be treated as a medical expense (17.1) if you can prove what part of the lump sum is allocable to future medical coverage. The IRS recognizes that a deduction may be based on a showing that the life-care facility historically allocates a specified percentage of the fee to future medical care. With such proof there is a current obligation to pay and the allocable amount is treated as a deductible medical expense when the lump sum is paid. The same rules apply if the life-care or founder’s fee is paid monthly rather than as a lump sum.

Separate sponsorship gift. In one case, an individual was allowed by the Tax Court and an appeals court to claim a charitable contribution deduction for a “sponsorship gift” paid to a life-care retirement facility where she and her husband were residents. The sponsorship gift was entirely separate from her entrance fee; it was not required for admission and did not entitle her to reduced monthly payments. She did not receive any extra benefit from her gift and was not entitled to a refund of any part of it.

34.10 Medicare Part B and Part D Premiums for 2017

At the time this book was completed, the Medicare Part B monthly premiums for 2017 had not yet been announced. Individuals with modified adjusted gross income (MAGI) over $85,000, and married couples filing jointly with MAGI over $170,000, must pay a surcharge in addition to the basic Part B premium. The surcharges for 2017 are based on MAGI for 2015 (two years prior to the 2017 premium year).

Individuals subject to the Part B surcharges also must pay higher Medicare Part D prescription drug plan premiums. See the e-Supplement at jklasser.com for a table showing the 2017 premium amounts, including the applicable surcharges.

34.11 Special Tax Rules for the Disabled

The following special tax rules apply for disabled individuals:

• Higher standard deduction for the blind. If you are completely blind, or partially blind with a note from an ophthalmologist or optometrist that vision is no better than 20/200 in the better eye with corrective lenses or that the field of vision is 20 degrees or less, you can claim an additional standard deduction amount if you do not itemize personal deductions (13.4). The additional amount for 2016 is $1,550 if you are single or head of household, or $1,250 if you are married filing jointly, married filing separately, or a qualifying widow(er).
• Workers’ compensation. This benefit, which is paid because of an injury or illness sustained on a job, is usually tax free (2.13).
• Social Security disability benefits. If you are a worker receiving Social Security benefits on account of disability, the benefits are taxed in the same way as benefits received by retirees (34.3). If you also receive workers’ compensation that reduces Social Security benefits, all of the benefits are treated as Social Security benefits, which may be partially includible in gross income.
• Tax credit for the permanently disabled. The same tax credit for seniors (age 65 and older) who receive little or no Social Security or Railroad Retirement benefits applies for those who are permanently and totally disabled (34.7).
• ABLE accounts. A special savings account can be used to pay for an array of qualified disability expenses (34.12).
• Impairment-related work expenses. Work-related expenses incurred because of a disability are deductible as unreimbursed employee business expenses but are not subject to the 2% of adjusted gross income floor (19.4).
• Penalty-free distributions from qualified retirement plans and IRAs. The 10% early distribution penalty does not apply for withdrawals made by someone who is disabled (7.13; 8.12).
• Extended period for refund claims. The usual period for claiming a tax refund is suspended for someone unable to manage his or her financial affairs due to a disability (47.2).

Those who care for a disabled individual may qualify for special tax rules:

• Dependent care credit. Those who work and care for a spouse or child of any age who is physically or mentally incapable of self care may claim a dependent care credit (25.4).
• Earned income credit. When claiming an earned income credit, a disabled child is a qualifying child, regardless of age (25.6).
• Medical expenses. Various costs for the care of a disabled person may qualify as a deductible medical expense (17.1), including special schooling for a physically or mentally handicapped child.

34.12 ABLE Accounts

Late in 2014 Congress created Achieving a Better Life Experience (ABLE) accounts to enable savings for disabled individuals without causing them to lose eligibility for government programs, such as Medicaid. These savings accounts are now operational.

Setting up an ABLE account. Each state can establish ABLE accounts for its residents or for nonresidents. The person holding the disabled individual’s power of attorney may establish an ABLE account if the beneficiary cannot do so, or the beneficiary’s parent or guardian may do so if no one has power of attorney.

At the time an ABLE account is set up, evidence must be presented to the state that the beneficiary became blind or disabled before age 26 and is entitled to Social Security disability benefits; otherwise a disability certification, signed under penalties of perjury, and accompanied by a physician’s diagnosis, must be submitted. Annual recertifications of disability must be made; check with the plan administrator for details because “deemed recertifications” may be permissible.

A beneficiary can have only one ABLE account, and when establishing an ABLE account, the beneficiary must check a box or otherwise verify, under penalties of perjury, that the account being established is his or her only ABLE account.

If a beneficiary establishes an ABLE account in a state and then moves to another state, the ABLE account can remain with the state in which the account was created although the beneficiary is no longer a resident. However, a program-to-program transfer or a 60-day rollover of a distribution to another state program is allowed; such transfers do not violate the rule prohibiting multiple ABLE accounts. A program-to-program transfer is not treated as a taxable distribution; a rollover is not taxable unless it is within 12 months of a prior ABLE account rollover.

Contributions. Nondeductible cash contributions can be made up to the annual gift tax exclusion, currently $14,000, and in the aggregate, contributions cannot exceed the state’s limit for a Section 529 qualified tuition program (33.5).

Distributions. ABLE account distributions for a year that do not exceed the beneficiary’s annual qualified disability expenses are not taxed. If the distributions exceed the qualifying expenses, the portion of the distributions allocable to earnings that are not attributable to qualifying expenses are taxable and also subject to a 10% penalty.

The term “qualified disability expenses” has been broadly defined by the IRS in order to carry out Congress’s intent to assist the beneficiaries in maintaining or improving their “health, independence, or quality of life.” Thus, qualified disability expenses are not limited to medically necessary items, but may also include basic living costs. This includes education, housing, transportation, employment training and support, assistive technology, personal support services, wellness programs, financial management, and legal fees. An IRS example indicates that buying and maintaining a smart phone would be a qualified expense for a child with autism where it helps the child navigate and communicate more safely and effectively.

Reporting. Because contributions are not tax deductible, no reporting is required when funds are added to accounts. However, contributions made during the year (including rollover contributions), as well as cumulative contributions, the fair market value of the account, and a code showing the beneficiary’s type of disability, will be reported to the beneficiary and the IRS on Form 5498-QA (ABLE Account Contribution Information).

Distributions are reported on Form 1099-QA (Distributions from ABLE Accounts). The form shows the gross distribution, earnings, and basis (total contributions), and indicates if a program-to-program transfer was made.