Chapter 34
Special Tax Rules for Senior Citizens and the Disabled

All of your Social Security benefits are tax free if your “provisional income,” explained in 34.3, is $25,000 or less if you are single, or $32,000 or less if you are married and file a joint return. No more than 50% of your benefits are subject to tax if you file a joint return and your provisional income is over $32,000 but no more than $44,000, or if you are single and your provisional income is over $25,000 but no more than $34,000. When provisional income exceeds $34,000 or $44,000 (depending on your filing status), no more than 85% of your benefits are subject to tax. If you are married and filing separately, and did not live apart for the whole year, you must apply the 85% rate without considering the base amounts. If you are married filing separately and you lived apart the entire year, are a head of household, or are a qualifying widow/widower, use the $25,000 and $34,000 amounts for single persons.

If you are receiving Social Security benefits but continue to earn wages or self-employed income, you must pay FICA taxes or self-employment tax on that income regardless of your age.

If you are on Medicare, be sure you understand the impact of adjusted gross income on your premiums (34.10).

If you are disabled, you may be receiving Social Security and other benefits. The tax rules for Social Security disability payments are the same as for Social Security retirement payments. Other government benefits may be tax free (34.11).

Those who become disabled at a young age may be able to have a special savings account, called an ABLE account, which does not prevent eligibility for government programs, such as Medicaid (34.12).

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, 2018, you do not have to file a 2017 return unless your gross income is $11,950 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 $23,300 or over, or $22,050 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, 2018, 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 2017 return, or $1,250 if you are married or a qualifying widow/widower (13.4). Your 2017 standard deduction is $7,900 if you are single. If married filing jointly, it is $13,950 if one of you is age 65 or over, or $15,200 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 minimal 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 2017, 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 2017. Box 3 of Form SSA-1099 shows the total benefits paid to you in 2017. 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. 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. However, Box 3 does not include Supplemental Security Income (SSI), which is not taxable.

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 2017 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 in order for the total benefits to stay within an overall limit. The combined monthly total of the workers’ compensation and Social Security disability cannot exceed 80% of your “average current earnings” before you became disabled. If the total exceeds 80%, your Social Security disability benefits are reduced by the excess amount. The reduction continues until you reach your full retirement age (34.5).

However, when your Social Security disability benefits are reduced under the 80% rule, the amount reported to you in Box 3 of Form SSA-1099 as “benefits paid” includes the reduction. Box 3 will include the reduction (it will be labeled as “workers’ compensation offset” in the description section below Box 3) as a “benefit paid” to you although you did not receive it. For purposes of the computation steps to determine taxability of benefits (34.3), you treat the full amount shown in Box 3 as your Social Security benefits.

In several cases, disabled workers whose Social Security disability benefits were reduced because they received workers’ compensation argued that since the workers’ compensation payments are tax free (2.13), the portion of Social Security benefits not paid to them because of the overall limit 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. See IRS Publication 915 for further details.

34.3 Computing Taxable Social Security Benefits

To calculate the taxable part of your Social Security benefits you must determine your provisional income. Provisional income is not an amount you find on your tax return; it is only relevant to the computation of your Social Security benefits. As detailed below in Worksheet 34-1, provisional income will always be more than the “total income” reported on your return because you have to increase your reported income by 50% of your net Social Security benefits, tax-exempt interest if any, and certain other fringe benefits and above-the-line adjustments claimed on your return.

You must compare your provisional income to the base amount and adjusted base amount allowed for your filing status:

• The base amount is $25,000 and 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 the entire year.
• The base amount is $32,000 and the adjusted base amount is $44,000 if your filing status is married filing jointly.

The law does not allow a base amount or adjusted base amount to married persons filing separately if they live together at any time during the year; see the Caution on this page.

How much is taxable? None of your benefits are taxable if your base amount ($25,000 or $32,000) equals or exceeds your provisional income. If your provisional income exceeds the base amount, part of your net benefits (shown in Box 5 of Form SSA-1099) is taxable, depending on the excess.

If your provisional income exceeds your base amount but not the adjusted base amount, the taxable portion is the lesser of (1) 50% of your net benefits (50% of the amount shown in Box 5 of Form SSA-1099), or (2) 50% of the excess of provisional income over the base amount; see Example 2 below. If provisional income exceeds the adjusted base amount, the taxable amount will be higher, but it cannot exceed 85% of net Social Security benefits; see Example 3.

You can use Worksheet 34-1 to determine how much of your net Social Security benefits are subject to tax. First figure your provisional income on Lines 1–8 of the Worksheet, and then use Lines 9–22 to figure the amount of your taxable benefits.

IRA contributions. Do not use Worksheet 34-1 to figure your taxable Social Security benefits for 2017 if (1) you made or are planning to make a contribution to a traditional IRA (8.4) for 2017, and (2) you or your spouse is an active participant (8.5) in an employer plan for 2017. In that case, you must use three worksheets in Appendix B of IRS Publication 590-A. The first worksheet is used to determine the amount of Social Security benefits that would be subject to tax if no IRA deduction were claimed. That taxable Social Security amount (if any) is included in MAGI on the second worksheet in order to figure if your IRA deduction is affected by the deduction phase-out rules (8.4) for active plan participants. Finally, the allowable IRA deduction from the second worksheet is included in the third worksheet to compute the taxable portion of your Social Security benefits.

34.4 Election for Lump-Sum Social Security Benefit Payment

If in 2017 you receive a lump-sum payment of Social Security benefits (whether retirement or disability 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 2017 benefit taxable under the regular rules (34.3), or (2) you may allocate the benefits between 2017 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 2017 lump-sum payment that includes benefits for 2016, you may find that an allocation of benefits is advantageous where your income over the two-year period has fluctuated and benefits allocated to 2016 would be subject to a lower taxable percentage than if they were treated as 2017 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 1956 and elect benefits at age 62 in 2018, the benefit is 73.3333% of what could be claimed at full retirement (age 66 and 4 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 2017, the limit was $16,920 (the 2018 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 2017 you reached the full Social Security retirement age of 66, benefits were reduced $1 for every $3 of earnings over $44,880, 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 2017 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, 2018; or
• You were under age 65 at the end of 2017, you retired before the end of 2017 because of permanent and total disability, you received taxable disability income in 2017 from your former employer’s disability plan, and you had not reached mandatory retirement age from the employer plan as of January 1, 2017. 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 Example above.

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 2018

The standard monthly Medicare Part B premium for 2018 is $134, but the premium is less for some Part B enrollees who have the premium deducted from their Social Security benefits. 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 $134 Part B premium. The surcharges for 2018 are generally based on MAGI for 2016 (two years prior to the 2018 premium year). Individuals subject to the Part B surcharges also must pay a surcharge in addition to their regular Medicare Part D prescription drug plan premiums. See the e-Supplement at jklasser.com for a table showing the 2018 Part B premium amounts, and the Part B and D 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 2017 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

ABLE accounts (authorized by the Stephen Beck Jr. Achieving a Better Life Experience Act of 2014) allow contributions (nondeductible) to be made to tax-favored accounts for certain disabled individuals without causing them to lose eligibility for government programs, such as Medicaid. Earnings in an ABLE account are not taxed unless a distribution exceeds the beneficiary’s qualified disability expenses for that year.

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 to an ABLE account by anyone, but the combined contributions (not counting rollovers or program-to-program transfers) from all contributors may not exceed the annual gift tax exclusion, currently $14,000. In addition, aggregate contributions cannot exceed the state’s limit for a Section 529 qualified tuition program (33.5). Contributions in excess of the annual gift tax exclusion, plus earnings on the excess, must be returned by the administrator of the ABLE program to the contributors by the beneficiary’s filing due date (including extensions) in order for the contributors to avoid a 6% penalty; the penalty is figured on Form 5329.

Contributions will be reported to the beneficiary and to the IRS on Form 5498-QA. Form 5498-QA will be issued even for years for which no contributions are made; the fair market value of the account as of the end of the year will be reported, and a code showing the basis of the beneficiary’s eligibility will be included.

Distributions. ABLE account distributions are reported to the beneficiary (and the IRS) on Form 1099-QA. If the distributions for a year do not exceed the beneficiary’s annual qualified disability expenses, they 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 figured on Form 5329. For example, if the qualified disability expenses for the year are 70% of the ABLE account distributions, then 70% of the earnings portion of the distribution will be tax free and 30% of the earnings portion will be taxable and subject to the 10% penalty.

Form 1099-QA will show the gross distribution, the earnings portion of the distribution, and the basis (total contributions) allocable to the distribution. A box will be checked if a program-to-program transfer was made or if the ABLE account was terminated.

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.