by Brynne Conroy
Contributor
Disabled Americans face many financial hurdles, and the high cost of medical care may be the biggest.
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.
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 ued for medical costs or any other expenses.
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.
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’t pay any taxes on interest accrued. And in some states, your contributions are even tax deductible.
An ABLE account can be opened at any age. However, the applicant must have been age 26 or younger at the onset of their disability to qualify. 
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.
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.
Pennsylvania is one of two states — the other is Mississippi — that gives a dollar-for-dollar deduction for contributions to an ABLE account so we are using guidelines there for this example.. Let’s 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.
Rather than paying your rent out of your checking account, you transfer your rent money to your ABLE account. That’s $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.
You also have to remember that there are fees associated with the ABLE account. First, your checkbook will cost $6 in Pennsylvania. You’ll have to fund your account with at least an additional $11.25 every quarter to cover account maintenance fees. Because you’re not investing, you won’t have to pay any investment fees.
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.
You’ve 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’ll save per year, simply by paying out of your ABLE account rather than your checking account.
This math is valid only for the state of Pennsylvania. Because different states have different tax rates and ABLE account fees, you’ll want to run your own savings calculations before implementing this strategy.
Yes and no. You cannot deduct contributions to an ABLE account on your federal income tax return.
But contributions to an ABLE account do currently qualify for the Saver’s Credit. The maximum Saver’s Credit is $1,000 for an individual, but this max varies depending on your adjusted gross income (AGI).
The Saver’s 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’s Credit would bring that total down to $800. But if you owe $0 in federal taxes, the Saver’s Credit won’t do anything for you. It’s not refundable.
In our example of the Pennsylvania renter, we’ll assume you’re 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.
Your state tax savings was $356, plus another $1,000 on your federal taxes through the Saver’s Credit, which means this method saved you $1,356/year.
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.
If you’re 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’t 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.
The maximum you can contribute depends on your state, and the numbers vary from year to year. Here are the max limits for 2022:
ABLE to Work makes it more feasible to cover all of your housing costs through your ABLE account, but in all reality you may also be using your ABLE account to pay for other, additional expenses. You may even be investing the money in your ABLE account to fund things like college or retirement.
Even if you’re using the money for other qualified expenses not related to housing, the contributions are all that matter for these specific tax deductions and credits.
Not all states offer a state tax deduction for contributions to an ABLE account. In fact, only two states allow you to deduct 100% of your ABLE account contributions on your state taxes: Mississippi and Pennsylvania.
However, there are a number of states which allow limited deductions on your state tax return. (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming don’t have state income tax.)
Even if you’re not worried about asset tests, using an ABLE account can provide you with meaningful state tax deductions depending on where you live, and may help you qualify for the federal Saver’s Credit. These deductions and credits can add up to hundreds of dollars per year, and can sometimes even exceed $1,000, even after accounting for ABLE maintenance fees.
As people who pinch every penny, we’d argue that’s well worth the effort.
Pittsburgh-based writer Brynne Conroy is the founder of the Femme Frugality blog and the author of “The Feminist Financial Handbook.” She is a regular contributor to The Penny Hoarder.
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