{"id":9960,"date":"2025-02-10T19:30:36","date_gmt":"2025-02-10T19:30:36","guid":{"rendered":"https:\/\/finderica.com\/?p=9960"},"modified":"2025-02-10T19:30:36","modified_gmt":"2025-02-10T19:30:36","slug":"disabled-can-use-able-account-tax-break-for-housing","status":"publish","type":"post","link":"https:\/\/finderica.com\/?p=9960","title":{"rendered":"Disabled Can Use ABLE Account Tax Break for Housing"},"content":{"rendered":"\n
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Disabled Americans face many financial hurdles, and the high cost of medical care may be the biggest.<\/p>\n

But when the disabled need to access assistance programs in order to pay for that medical care, there are often asset tests that limit the amount they are allowed to have in savings. And sometimes even the amount they are allowed to earn.<\/p>\n

This post will introduce one of those rare silver linings in disability finance. We will show how to use an ABLE account to make housing costs deductible on tax returns in the states that allow this deduction. The money saved can be used for medical costs or any other expenses.\n<\/p>\n

How to Lower Your State Tax Burden by Paying Rent<\/h2>\n

The primary purpose of an ABLE account is to help qualified people get around those asset tests. Money saved in an ABLE account cannot be counted against the disabled when applying for SSI, Medicaid or a number of other social programs, as long as the balance is under $100,000.<\/p>\n

In addition to the perks of sheltering your assets, ABLE accounts also provide great tax benefits. As long as the money is used for qualified expenses, you won\u2019t pay any taxes on interest accrued. And in some states, your contributions are even tax deductible.<\/p>\n

Another thing that makes ABLE accounts stand out is that one of their qualified expenses is housing costs. Even a Supplemental Needs Trust cannot be used to pay for housing expenses, so this is a huge deal.<\/p>\n

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When you log into your bank account, how do your savings look? Probably not as good as you\u2019d like.<\/p>\n

It always seems like an uphill battle to build (and keep) a decent amount in savings. But what if your car breaks down, or you have a sudden medical bill?<\/p>\n

Ask one of these companies to help\u2026<\/a><\/p>\n<\/div>\n<\/div>\n

This allows you to strategize your contributions and expenses to pay things like your rent or mortgage. In some states, those contributions will be 100% deductible on your state tax returns.<\/p>\n

Let\u2019s Run the Math<\/h3>\n

Pennsylvania is one of two states \u2014 the other is Mississippi \u2014 that gives a dollar-for-dollar deduction for contributions to an ABLE account so we are using guidelines there for this example.. Let\u2019s say you make $40,000\/year, and pay $1,100\/month in rent as a Pennsylvania resident. That adds up to $13,200\/year in housing expenses.<\/p>\n

Rather than paying your rent out of your checking account, you transfer your rent money to your ABLE account. That\u2019s $13,200 in annual contributions to your ABLE account. You keep the money in the checking account portion of the ABLE account rather than using your account as an investment vehicle. Every month, you write your rent check with the checkbook provided for your ABLE account.<\/p>\n

You also have to remember that there are fees associated with the ABLE account. First, your checkbook will cost $6 in Pennsylvania. You\u2019ll have to fund your account with at least an additional $11.25 every quarter to cover account maintenance fees. Because you\u2019re not investing, you won\u2019t have to pay any investment fees.<\/p>\n

In total, your contributions to the ABLE account are $13,251. When you file your taxes the next year, your taxable income will decrease by that much, going from $40,000 to $26,749. Currently, Pennsylvania income tax rates are 3.07%. That means your tax due would go down from $1,228 to $821.<\/p>\n

How Much Did You Save?<\/h4>\n

You\u2019ve paid $51 in ABLE-related fees, but saved $407 on your taxes. That makes your total overall savings $356\/year. The higher your rent, the more you\u2019ll save per year, simply by paying out of your ABLE account rather than your checking account.<\/p>\n

This math is valid only for the state of Pennsylvania. Because different states have different tax rates and ABLE account fees, you\u2019ll want to run your own savings calculations before implementing this strategy.<\/p>\n

Will This Help Me Save Money on Federal Income Taxes?<\/h3>\n

Yes and no. You cannot deduct contributions to an ABLE account on your federal income tax return.<\/p>\n

But contributions to an ABLE account do currently qualify for the Saver\u2019s Credit<\/a>. The maximum Saver\u2019s Credit is $1,000 for an individual, but this max varies depending on your adjusted gross income (AGI).<\/p>\n

The Saver\u2019s Credit is nonrefundable. That means it will reduce your tax burden dollar-for-dollar until you reach $0. If you owe $1,800 in federal taxes, the max Saver\u2019s Credit would bring that total down to $800. But if you owe $0 in federal taxes, the Saver\u2019s Credit won\u2019t do anything for you. It\u2019s not refundable.<\/p>\n

In our example of the Pennsylvania renter, we\u2019ll assume you\u2019re self-employed and owe more than $1,000 in federal income taxes. Because of your AGI and the amount you contributed to your ABLE account, you hypothetically qualify for the full $1,000 credit.<\/p>\n

Your state tax savings was $356, plus another $1,000 on your federal taxes through the Saver\u2019s Credit, which means this method saved you $1,356\/year.<\/p>\n

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What If My Housing Costs Are More Than $16K a Year?<\/h2>\n

The standard contribution limit for an ABLE account is currently $16,000 a year, meaning raw contributions will only cover an average of about $1,333 a month for rent or mortgage payments. So even if you use this strategy, you may not be able to pay 100% of your housing costs with your ABLE account.<\/p>\n

If you\u2019re disabled and have a job, however, you can contribute in excess of the $16,000 limit thanks to the ABLE to Work Act, which passed in 2017. As long as you don\u2019t have a 401(k), 403(b) or other defined contribution plan through your employer, you can put 100% of your income into your ABLE account up to a set maximum.<\/p>\n

The maximum you can contribute depends on your state, and the numbers vary from year to year. Here are the max limits for 2022:<\/p>\n