Tax Planning for Families with Special Needs

Jeff Vistica
CFP®, ChSNC®, AIF®
June 7, 2021

This is the second of two articles on how special needs families can minimize federal and state income tax liabilities, now and in the future. The first in the series is 10 Tax Tips for Families with Special Needs. This article was originally published on Special Needs Resources Foundation of San Diego.

It’s a good time to start planning ahead to minimize taxes for 2021 and beyond. A key consideration for those caring for loved ones with special needs are the tax advantages associated with accounts such as a Flexible Spending Account (FSA), Health Savings Account (HSA) and an ABLE Account.

How do you know which type of account is appropriate for you? Here’s an overview of each:

FSAs and HSAs

An FSA is an arrangement with your employer that permits you to pay for out-of-pocket medical expenses with tax-free dollars. You decide how much to contribute to an FSA, up to a limit set by your employer.

An HSA can be considered if you have a high deductible health plan and are not enrolled in Medicare.  You can use the money you contribute to an HSA to cover certain medical expenses. HSA contributions are tax-deductible or are made pretax if they are deducted from your wages.

There’s an important difference between HSAs and FSAs. With an FSA, unused contributions above $500 are forfeited at the end of the year. With an HSA, unused funds roll over every year and remain in your account until you withdraw the money. An HSA can’t be used by a person receiving public benefits.

ABLE Accounts

As a result of the passage of the Achieving a Better Life Experience Act of 2014, ABLE accounts were developed as tax-advantaged savings accounts for individuals with disabilities and their families. Anyone eligible for an ABLE account should consider setting one up. You qualify if the age of onset of your disability was before you turned 26. The ABLE account allows people to establish savings without impacting the ability to receive SSI or Medicaid. You can accumulate up to $100,000 before SSI payments would be suspended.

Anyone can contribute to an ABLE account, but the limit for 2021 is $15,000. If you are working and not participating in an employer sponsored plan such as a 401(k), you can make an additional contribution up to $12,760 for 2021. Check your state’s Medicaid payback provision rules where ABLE account balances may be subject to a payback for all Medicaid costs. For more information, visit the ABLE National Resource Center

Also check your state’s requirements for total, allowable ABLE savings over a lifetime.  Contributions to ABLE accounts aren’t tax deductible on a federal tax return, but the growth is tax free and distributions for qualified disability expenses are also not taxed. Some of these expenses may also be deductible if you are working and have a disability. Savingforcollege.com provides more information on states that allow for a state income tax deduction.

Managing Trust Assets

It’s important to note that if you’re managing assets in a special needs trust, consult with a professional who focuses on keeping costs and fees low, and who can advise you on how to minimize or defer taxes generated by trust investments. There are many online tools that help with expense tracking, but the one I recommend to clients is Simplifi by Quicken.

There are many ways to minimize your federal and state income tax liability now and in the future. Be sure that you, with the assistance of a tax professional and investment advisor, are taking full advantage of these opportunities.

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