Tax Law Changes for Those with Disabilities
You may have noticed some of its effects in your take-home pay when Congress passed a brand new tax law late in 2017. As we all get ready to file our first tax returns under the new law, you might wonder what it will mean for your family member who has a disability.
One big change is that tax rates are generally lower under the new law.
A single person with a taxable income of $25,000, for example, would have paid $3,283.75 in federal income taxes before the change. Under the new law, a single persons’ tax bill will be $2,809.25—a savings of almost $500. That change applies to everyone, not just people with disabilities or their caregivers.
What taxes will you pay if, say, receiving Social Security Disability or Supplemental Security Income payments?
Taxation of Social Security Benefits
Actually, under the new tax law, not much changes in the taxation of Social Security benefits. Roughly, one-third of Social Security Disability Insurance recipients pay income tax on their benefits. Those who do generally have taxable income from some other source. If, for example, a single person has $25,000 in interest or dividend income, they might have to pay taxes on that income plus a portion of their Social Security payments.
If a single persons’ only income is Social Security, then you won’t have to pay any taxes on that income. However, if that person is married, a spouse’s income may figure into the calculation. The married couple can earn up to $32,000 from sources other than Social Security before any of the disability benefits are taxable.
Tax Deductions and Credits
For taxpayers who itemize their deductions (most don’t, due to the increase in the standard deduction), there are changes in how to calculate those deductions. At least one tax credit figures into income taxes for some caregivers.
This is surprisingly good news for people with disabilities because their medical expenses will still be deductible. That said, the increase in the standard deduction might mean that many people do not need to keep track of medical expenses at all, but for those who spend a lot on medical care, the deduction remains. In fact, it is somewhat enhanced for the 2017 and 2018 tax years, since the threshold for claiming medical expenses dropped from 10% to 7.5% of adjusted gross income. Unless the law is amended, beginning with the 2019 tax year, medical expenses can be deducted to the extent they exceed 10% of the taxpayers Adjusted Gross Income.
The child tax credit doubled to $2,000 per child. It can be claimed by people who have a dependent under age 16 and income of less than $200,000 (or less than $400 for married couples). Because it is a credit, it reduces any tax due dollar for dollar. Remember the example above? If the person had a child under 16, the tax bill would be reduced very close to zero. In fact, a person could get up to $1,400 of the tax credit back even if they had paid no taxes at all. It would not matter that persons’ 12-year-old son had a disability, but it might make a big difference in their ability to care for their son.
Special Needs Trusts
There are good news and bad news for trust beneficiaries. The good news is mostly for beneficiaries of third-party special needs trusts. The bad news is mostly for those who had a special needs trust set up to handle a personal injury settlement, or an unrestricted inheritance.
First the good news: most third-party special needs trusts will still meet the definition of a “Qualified Disability Trust.” That will mean that they get an extra deduction of $4,150 against trust income. It may not directly benefit the trust’s beneficiary, but it can reduce the amount of tax paid by the trust itself, leaving more intact to be applied for the use and needs of the beneficiary.
The bad news: self-settled special needs trust beneficiaries can no longer take deductions for most of the costs of managing the trust itself. Fiduciary/trustee fees, legal expenses, tax preparation fees, & other deductions that would have been subject to the 2% floor will no longer be deductible on the beneficiary’s tax return.
Under the new kiddie tax rules, the tax rate for minor trust beneficiaries of first-party supplemental needs trusts might literally go up. Remember, these first-party trusts are considered grantor trusts for tax filing purposes, and all items of income, deduction & credit are carried out and reported on the minor beneficiary’s personal income tax return. Under the existing law, in order to complete the child’s tax return, we needed to get a copy of the parents’ returns in order to determine the applicable tax rate to be applied to the minor’s income. Under the new law, the kiddie tax rate structure is now the same as the rate structure that applies to non-grantor trusts and estates, where income in excess of $12,500 is taxed at the 27% rate. This new structure eliminates the need of getting the parents’ returns, but in the case of monied trusts, likely at a much higher tax cost.
Not Everything Is About Taxes
Other things changed with the new tax law. Several changes were implemented to ABLE accounts. Although these changes have been in place for a full year, it is worth mentioning them again.
The Achieving a Better Life Experience (ABLE) Act, you may recall, allows up to $15,000 to be set aside each year for the use of a person with a disability. The beneficiary can control the funds (or his or her parents or guardian can manage the account), and the ABLE account will not affect Supplemental Security Income payments, Medicaid eligibility, or eligibility for other government benefits, so long as the balance of the account stays below $100,000.
The 2017 tax act made two important improvements to the ABLE Act. First, the law now allows a working individual with disabilities to put more than the $15,000 maximum into his or her ABLE account, at least in some cases. A qualifying beneficiary can put up to an additional $12,060 into his or her ABLE account.
The other big change allows money from a Section 529 plan (education) established for an individual with a disability, who is not likely to benefit from the education plan, to be rolled over into an ABLE account. Use this provision carefully—only $15,000 total can go into the ABLE Act account, and that figure includes any rollover money from the 529 account. In fact, there may be good reasons to delay making any such transfer, so make sure you’ve checked out the benefits and drawbacks with a knowledgeable adviser before making any change.
The Bottom Line
Tax law has always been confusing. Congress didn’t simplify the law last year, in fact, they made it even more complex. Make sure you talk through the choices and outcomes with your lawyer &/or accountant about the first year’s filing before you figure out what it all means for you.