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Despite Challenges, Opportunity Zones Provide Much-Needed Capital

Following a slow rollout of rules governing opportunity zones, a program Congress approved three years ago to encourage investment in low-income neighborhoods, developers have pumped billions of dollars into the zones nationwide, even in the midst of the pandemic.The program has drawn myriad detractors, including critics who charge investors are using it simply to avoid paying taxes. Others point to a lack of transparency that makes it tough to gauge whether the investments are making a real impact on communities.The Trump administration has resisted providing much federal reporting or oversight, but some states and cities are using the …

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How a Century of Real-Estate Tax Breaks Enriched Donald Trump

Twenty-five years before he was elected president, Donald J. Trump went to Capitol Hill to complain that Congress had closed too many tax loopholes. He warned that one industry, in particular, had been severely harmed: real estate.

The recent demise of real-estate tax shelters, part of a landmark 1986 overhaul of the tax code, was “an absolute catastrophe for the country,” Mr. Trump testified to Congress that day in November 1991.

“Real estate really means so many jobs,” he said. “You create so many other things. They buy carpet. They buy furniture. They buy refrigerators. They buy other things that fuel the economy.”

Mr. Trump was sounding a theme that has made real estate perhaps the tax code’s most-favored industry.

Legislators lapped it up. Mr. Trump and his fellow real estate investors got much of what he wanted, including the ability to fully deduct losses — sometimes only on paper — against other income.

Mr. Trump’s low taxes over the years were largely a product of his businesses hemorrhaging money, according to federal tax records obtained by The New York Times. But the records also show that so-called depreciation losses and other benefits for the real estate industry have helped Mr. Trump reduce his federal income taxes. In 2016 and 2017, Mr. Trump paid $750.

From the beginning, the real estate industry, with its claim to be a bedrock of the American way of life and its formidable lobbying power and lavish campaign contributions, has held disproportionate sway over how tax laws are written.

Tax breaks for real estate have been embedded in the federal income tax law for a century. New benefits sprouted up every few years. Even when lawmakers cracked down on business-friendly tax treatment, they often made special exceptions for real estate.

“The real estate industry has enjoyed the most lucrative tax breaks for decades,” said Victor Fleischer, a tax law professor at the University of California, Irvine, and former chief tax counsel for the Senate Finance Committee. The industry “thinks of the tax code as a basket of goodies to feast on rather than a financial obligation of doing business.”

The perks come in many varieties. One allows real estate investors to avoid capital-gains taxes when they sell properties as long as they use the proceeds to quickly buy others. Another gives developers a big break on taxes when they spend money on historical preservation.

Foremost among them is a deduction for depreciation, a provision originally included in the federal tax code in response to lobbying by the railroad industry.

Taxpayers are allowed to deduct from their annual taxable income a portion of the cost of an asset such as a locomotive or a building, as well as money spent on improving that asset. If you buy a building for $270,000, you can deduct $10,000 a year from your taxable income for 27 years. A profitable business can actually report losses on its tax returns because of depreciation deductions.

The tax benefit was meant to reflect the deterioration in value over time of an asset. But for the real estate industry, it can be a boondoggle: Many buildings kept in reasonable repair increase in value over time, unlike, say, cars or computers.

Depreciation is the ultimate tax shelter, critics say, because it permits real estate investors to take deductions for spending other people’s money. If a bank lends an investor $70 million to buy a $100 million office building, and none of the principal gets repaid for a decade — a common structure for such loans — the investor still gets to deduct that $100 million over several years, even though only $30 million of that is his own money.

In 1962, Congress passed rules that made the depreciation tax break less lucrative when someone sold the asset on which they had been taking deductions. But Congress exempted real estate.

“The real estate lobby always had a stronghold,” recalled Donald Lubick, at the time a top tax official in President John F. Kennedy’s Treasury Department.

Credit…Zach Gibson for The New York Times

Mr. Trump has taken hundreds of millions of dollars in depreciation deductions, his tax records show.

Most but not all of his depreciation expenses since 2010 stemmed from money he spent improving his golf courses and on transforming the Old Post Office building in Washington into a luxury hotel. Some of that spending was done with nearly $300 million that he borrowed from Deutsche Bank.

“That’s Trump’s story,” said Michael Graetz, a top tax official in the first Bush administration and now a professor at Columbia Law School. “His losses are somebody else’s money.”

Mr. Trump has publicly credited depreciation with lowering his tax bills. “I love depreciation,” he said during a presidential debate in 2016.

In reality, the fact that his businesses were losing money was a major factor in reducing his taxes.

For example, for Mr. Trump’s commercial real estate properties that reported losses between 2010 and 2018, about half of the losses — $54 million — came from depreciation, his tax records show.

Jared Kushner, Mr. Trump’s son-in-law and senior adviser, also has benefited from depreciation. The Times reported in 2018 that he likely didn’t pay federal income taxes for years, largely because he took deductions from depreciation.

In 1986, Congress reined in depreciation benefits and capped the amount of losses that real estate investors could use to offset other income.

The changes were meant to combat a proliferation of tax shelters in which investors put money into real estate partnerships that, thanks to depreciation, generated enormous only-on-paper losses that then canceled out income from other sources.

“The tax shelters were out of control,” said Daniel Shaviro, a tax professor at the New York University School of Law who worked on the Joint Congressional Committee on Taxation and helped draft the 1986 law. “Every lawyer and dentist had one.”

Knowing the real estate industry would mobilize, the congressional tax committee kept the proposed changes under wraps as long as possible. The industry “was caught flat-footed,” Mr. Shaviro said. Even so, “I knew they’d get it back thanks to their raw political power.”

It didn’t take long.

Mr. Trump, who blamed the 1986 law for a subsequent fall in real estate prices and a deep recession, was one of several developers who urged lawmakers to restore the breaks in full.


Credit…Marcy Nighswander/Associated Press

In 1993 Congress restored those breaks. At the same time, it carved out another advantage for the real estate industry. For most businesses, canceled or forgiven debts had to be recognized as income. Real estate investors for the most part got a pass, though they had to relinquish some future deductions. Mr. Trump has benefited from those rules, such as when his lenders canceled about $270 million of debt on his Chicago skyscraper, his tax records show.

Then Mr. Trump ran for president. On the campaign trail, he acknowledged that he had been a big winner from the tax code’s favoritism toward the real estate industry. He said his expertise on the subject would help him close loopholes and make the tax code fairer.

“The unfairness of the tax laws is unbelievable,” Mr. Trump said in 2016. “It’s something I’ve been talking about for a long time, despite, frankly, being a big beneficiary of the laws. But I’m working for you now. I’m not working for Trump.”

But Republicans’ 2017 tax overhaul, which remains Mr. Trump’s signature legislative achievement, expanded and enhanced several lucrative tax breaks for real estate developers. For example, while the law barred people and companies from avoiding capital-gains taxes by selling one property and buying another, one industry was exempted: real estate.

The law was a boon to people, like Mr. Trump, who owned golf courses. It permitted real estate investors to immediately write off the full cost of various expenses, including improvements to golf courses.

In recent years Mr. Trump has also taken advantage of a tax credit that covered 20 percent of developers’ costs of rehabilitating historical structures, which is meant to encourage the preservation of old buildings.

Mr. Trump has said that he spent $200 million transforming the Old Post Office Building in Washington, a designated landmark, into a luxury hotel. That could translate into a tax credit of as much as $40 million, which Mr. Trump could use to offset his taxes for up to 20 years. (The caveat is that such tax credits reduce a developer’s ability to take other tax deductions in the future.)

Mr. Trump’s tax records show that in 2017 he used at least $1.5 million in historical preservation tax credits. That was one of the reasons his federal income tax bill that year was only $750.

The 2017 law made that tax benefit less generous, reducing it to 4 percent from 20 percent of the rehabilitation costs. But properties opened before 2017 were exempted. Mr. Trump’s hotel opened in 2016.

Russ Buettner contributed reporting.

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Here’s How Moving to Work Remotely Could Affect Your Taxes

If you decided to ride out the pandemic at your out-of-state vacation house or with your parents in the suburbs, you may be in for an unpleasant reality: a hefty tax bill.

Given the complexity of state tax laws, accountants are advising their clients to track the number of days they spend working out of state. Some states impose income tax on people who work there for as little as a single day.

Even before the pandemic, conflicting state tax rules were creating issues for the increasing number of people who were working remotely, said Edward Zelinsky, a tax professor at Yeshiva University’s Cardozo School of Law.

“In the last six months, this has gone from a big problem to a humongous problem,” Mr. Zelinsky said. He knows from personal experience: He lives in Connecticut but works in New York and has paid tax on his New York-based salary to both states.

You might, depending on the state and how long you have been there.

The state where you have your primary residence typically can tax your worldwide income, and any state where you earn income also has the right to tax you on the income you earn in that state, said Kirk Stark, a professor of tax law at the University of California, Los Angeles.

“That immediately creates a possibility of two separate states taxing the same income,” Mr. Stark said.

Many states offer credits for taxes paid to other states, and that may ease the burden. But if the state where you have relocated does not have a reciprocity agreement with the state of your primary residence, you could be subject to double state-income taxation.

You have less to worry about if you have relocated to one of these 13 states, which have agreed not to tax workers who have moved there temporarily because of the pandemic: Alabama, Georgia, Illinois, Indiana, Massachusetts, Maryland, Minnesota, Mississippi, Nebraska, New Jersey, Pennsylvania, Rhode Island and South Carolina, according to the Association of International Certified Professional Accountants.

Unfortunately not, unless you are prepared to move there permanently.

Navneet Garodia, 35, a financial services professional, has an apartment in Jersey City, N.J., but moved in July to his in-laws’ house in Florida so that he and his family could have more space. He plans to reduce his New Jersey tax payments to account for the days he has worked from Florida, a state that does not impose income tax on residents.

“I shouldn’t be paying the amount of taxes I am in New Jersey, and Florida has no taxes,” he said. He has taken steps to show tax authorities that he is, in fact, in Florida, such as forwarding his mail to his address there.

But Mark S. Klein, the chairman of the law firm Hodgson Russ, says it is not that simple, as long as taxpayers still have a primary residence in the state where they had been working and intend to return there. The same applies for people who have moved to the Hamptons for the last few months — they will not be exempt from New York City tax if they return to the city once the pandemic is over.

“The rule with changing your domicile is you have to leave New York City, land in a new location and stick the landing,” Mr. Klein said.

Yes. Mr. Klein said more than 50 of his clients had moved to Florida, Texas, Nevada or Wyoming since March.

“It’s not a coincidence that these are no-tax states,” he said. The other states with no income tax are Alaska, South Dakota and Washington. Many of his clients have kept their residences in California or New York, he said, but will plan to spend the majority of the year in their homes in lower-tax or no-tax states.

Kent and Ruby Santin, who had lived in Long Island City, Queens, said they were looking to buy in New York when the pandemic hit. Instead, seeking better access to the outdoors, they changed course and bought a house on Lake Tahoe in Nevada.

The lack of income tax there was also a big plus. “That was part of the decision, to be totally honest,” Mr. Santin, 30, a management consultant said.

“Federalism,” Mr. Zelinsky said. Under the U.S. Constitution, states are permitted to create their own tax rules.

“What we’ve learned in the last six months are the benefits and the disadvantages of federalism,” he said. The benefits include governors who acted responsibly in managing the pandemic who “can make up for deficiencies of the federal government,” he said.

“The disadvantages are that states are going to have 50 different tax rules.”

Auditors are persistent, especially in New York. They will want to know how many days you have been in a state and will check your phone records, your credit card receipts, your voter registration, your travel records and details indicating how permanent your second residence is, including where your children are enrolled in school.

Even the nurses who came to New York to treat coronavirus patients will be subject to New York income tax if they worked in the state for more than 14 days, Gov. Andrew M. Cuomo said in May.

“We’re not in a position to provide any more subsidies right now because we have a $13 billion deficit,” Mr. Cuomo said at a news conference.

Nishant Mittal, the general manager of Topia Compass, which offers an app to help people keep track of their whereabouts for tax purposes, said he saw a 513 percent rise in subscribers in June, compared with June last year.

He said most of his clients did not envision a situation in which they would be working from the office as much as they did before the pandemic. “At this point, it’s no secret that this is going to be a big headache,” he said.

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The Tax-Break Bonanza Inside the Economic Rescue Package

As the federal government dispenses trillions of dollars to save the economy, small businesses and out-of-work individuals are jostling to grab small slices of aid before the funds run out.

But another group is in no danger of missing out: wealthy individuals and big companies that are poised for tax windfalls.

As part of the economic rescue package that became law last month, the federal government is giving away $174 billion in temporary tax breaks overwhelmingly to rich individuals and large companies, according to interviews and government estimates.

Some of the breaks apply to taxes have long been in the cross hairs of corporate lobbyists. They undo limitations that were imposed to rein in the giveaways embedded in a $1.5 trillion tax-cut package enacted in 2017. None specifically target businesses or individuals harmed by the coronavirus.

One provision tucked into the federal economic-rescue law increases the amount of deductions companies are permitted to take on the interest they pay on large quantities of debt. Only companies with at least $25 million in annual receipts can qualify for that break.

Another change lets people deduct even more of their businesses’ losses from any winnings they reaped in the stock market, sharply reducing what they owe in capital gains taxes. Only households earning at least $500,000 a year — the top 1 percent of American taxpayers — are eligible.

And yet another provision in last month’s rescue package allows companies to deduct losses in one year against profits that they earned years earlier. The tax break most likely won’t put any extra cash directly into the hands of companies hit by the current crisis for at least a year.

The bottom line is that, barely two years after congressional Republicans and President Trump lavished America’s wealthiest families and companies with a series of lucrative tax cuts, those same beneficiaries are now receiving a second helping.

Many of the tax benefits in the stimulus are “just shoveling money to rich people,” said Victor Fleischer, a tax law professor at the University of California, Irvine. While the 2017 tax-cut package was a bonanza for big companies and wealthy individuals, in order to keep the law’s overall costs down it imposed a number of restrictions on who could take advantage of certain tax breaks and how much those taxpayers could reap.

Now, with the 2020 stimulus package, Congress has temporarily repealed a number of those limitations.

“Under the cover of the pandemic, they are undoing the perfectly sensible limitations” that moderated the size of the 2017 tax cuts, said H. David Rosenbloom, a corporate tax lawyer at Caplin & Drysdale and head of the international tax program at New York University’s law school. “And taking into account the giveaways in that act, it’s a joke.”

Senator Charles Grassley, the Iowa Republican who is chairman of the Senate Finance Committee, defended the changes. The stimulus law “threw a much-needed financial lifeline to businesses of all sizes, types and industries to give them the best chance to survive,” he said. He added, “The attempt to paint these bipartisan tax provisions as a boon for particular industries or investors completely misses the mark.”

One of the breaks temporarily rolls back the 2017 restriction on how much debt some companies can deduct from their taxes. That restriction was the subject of lobbying for the last two years by big companies, including Coca-Cola and Hewlett Packard Enterprise, according to federal lobbying records. The National Association of Manufacturers, whose board includes executives from Exxon Mobil, Raytheon, and Caterpillar, has pushed lawmakers for similar changes.

Earlier this month, the Joint Committee on Taxation, a nonpartisan congressional body, found that the two other breaks — those that allow people to deduct only-on-paper losses from their tax bills — would go largely to people making at least $1 million a year.

That analysis came in response to requests by the Democratic lawmakers Representative Lloyd Doggett of Texas and Senator Sheldon Whitehouse of Rhode Island. On Tuesday, Mr. Doggett introduced legislation that would roll back major chunks of the tax breaks. Among other things, it would no longer let people who earn more than $500,000 to immediately deduct all of that year’s business losses from their capital gains.

“Tax giveaways for a wealthy few shouldn’t have come near a coronavirus relief bill,” said Senator Whitehouse, who plans to introduce a Senate version.

The provision does not single out real estate. But the industry is well known for generating tax losses from depreciation even in profitable years.

The 2017 tax-cut law limited the ability to use those losses. A married couple could shelter only the first $500,000 of their nonbusiness income — such as capital gains from investments — in the year that the loss was generated. Any leftover losses would be rolled over into future years.

The stimulus undoes those restrictions for this year and, retroactively, for 2018 and 2019 — meaning that wealthy households will be able to shield far more of their capital gains from taxation.

The 2017 law also restricted the ability of companies to use so-called net operating losses — which are losses that companies report on their tax returns, even if they are otherwise profitable — to reduce their tax bills. (Net operating losses can include expenses that are only for tax purposes and that don’t reduce profits reported to shareholders.) No longer could such losses from one year be used to retroactively cancel out profits accumulated in previous years, thus generating tax refunds.

The new law temporarily undoes that restriction, enabling companies to use losses in one year to get refunds for previous profitable years.

Big companies, including Morgan Stanley, have lobbied on issues relating to such tax losses as recently as the first few months of this year, according to records compiled by the Center for Responsive Politics.

Among the problems with this tax break, critics say, is that it isn’t aimed at the companies hit by the coronavirus pandemic. Under the new law, companies that will suffer big losses in 2020 won’t be able to use those losses to obtain refunds until they file their tax returns at least a year from now.

The provision will quickly put cash into a company’s pockets if it had tax losses from 2019 or earlier — well before the pandemic — that can be applied against profits from preceding years.

“There’s no reason to send money in a blanket form to all the companies that have net operating losses,” said Mr. Fleischer. “We have some amazingly successful companies that don’t pay tax and have net operating losses, and there’s no reason to be subsidizing these companies or expect that money will find its way down to the employees.”

The tax breaks for companies that report losses are likely to be especially lucrative because the 2017 tax law created new deductions that could generate large paper losses — for tax purposes only — for otherwise profitable companies in 2018 and 2019. For example, the 2017 law permitted companies to fully write off certain types of investments in the first year, instead of stretching those deductions over several years. That, in turn, meant companies could report profits to their shareholders but losses on their tax returns.

A third break, worth more than $13 billion over a decade, temporarily loosens 2017 restrictions on how much interest big companies can deduct on their tax returns. Private equity firms, which rely on borrowed money to generate big profits, have been urging the Treasury Department to write favorable rules governing the restrictions on how much interest on their debt companies can deduct from taxes.

The private equity industry is poised to benefit from the rescue package. Companies with at least $25 million in annual revenue are now eligible to deduct more interest from their tax bills — a change that will make the private-equity business model even more lucrative. Private equity firms amplify their profits by using borrowed money to finance their investments. Deducting even more of the interest on that debt from their taxes would further boost their profits.

The tax break “allows private equity to swoop in and scoop up struggling businesses,” said Matthew Rappaport, a tax lawyer who specializes in private equity at Falcon Rappaport & Berkman in New York.

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Oil Companies Are Collapsing Due to Coronavirus, but Wind and Solar Energy Keep Growing

A few years ago, the kind of double-digit drop in oil and gas prices the world is experiencing now because of the coronavirus pandemic might have increased the use of fossil fuels and hurt renewable energy sources like wind and solar farms.That is not happening.In fact, renewable energy sources are set to account for nearly 21 percent of the electricity the United States uses for the first time this year, up from about 18 percent last year and 10 percent in 2010, according to one forecast published last week. And while work on some solar and wind projects has been delayed by …

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2 Tax Strategies to Consider Ahead of the 2020 Election

Trying to guess how and when the tax code is going to change and plan for those changes now is an impossible task.

Most prognosticators guessed correctly that President Trump was going to slash the corporate tax rate in 2017. But the doubling of the estate and gift tax exemption to more than $23 million a couple, from an already generous $11 million, was a bit of a surprise. More so was the elimination of deductions for state and local taxes, which disproportionately hit California and states in the Northeast that have high tax rates.

But with a presidential election just a few months away, the game of predicting and analyzing proposals that might affect taxpayers has begun. Most candidates are talking about the big headline-grabbing moves, like health insurance, climate change and infrastructure, as well as the wealth tax that Senators Elizabeth Warren and Bernie Sanders have pitched.

What needs to be analyzed for affluent individuals are the potential changes no candidate is talking about: lowering exemptions and raising rates for the estate and gift taxes and ending the valuation discount for closely held family businesses, a tax break that allows families to transfer a valuable asset for less than it is worth.

The valuation discount can affect any small business that the owner expects to pass to heirs. The current exemption levels for the estate and gift taxes are so high that the tax applies to very few people, but both the exemption level and the tax rate could change if the next president wants to raise revenue.

This is the first of what I expect will be several columns this year looking at how tax provisions that a new president can quickly change may affect high-net-worth individuals and what they can do to plan for them.

First, the estate tax. The current exemption, in effect until 2025, is $11.4 million for an individual and $23 million for a couple. Everything above that is taxed at a rate of 40 percent. Lowering the exemption and increasing the tax rate are on the agenda of many progressive candidates, who see the changes as a way to raise revenue and make a statement against income inequality.

The estate tax is high on the list for many candidates because it can fill the tax coffers without affecting a lot of people.

Such changes could be pushed through only if the Democratic Party took back the Senate and kept control of the House. President Trump faced a similar situation in his first two years in office when the Republican Party held both chambers. Just as he got his 2017 tax overhaul through the budget reconciliation process, a Democratic president could do the same.

Planning for what could happen with estate and gift taxes is a challenge. In 2012, the last time the estate and gift tax exemptions were predicted to decrease, they were raised instead.

“People say exemptions have never gone down,” said Chris Pegg, senior director of wealth planning for Wells Fargo Private Bank. “That’s true. But we’ve never had exemptions this large, and we’ve never had candidates talking about wealth redistribution. If you look at some of the dials that are most likely to be turned, I think the estate tax is one of them.”

Mr. Pegg said that taking advantage of the high estate tax exemption and the valuation discount around closely held businesses could allow business owners to pass more of their wealth to heirs free of tax. It could also help settle some business issues now, not later when the owners die.

“You have a powerful, tax-free way to move money,” said Joanne Johnson, senior wealth adviser at J.P. Morgan’s private bank. “Just moving money for the sake of moving money, it’s not impactful. You have to identify your goals — that’s the most important thing.”

In certain states, like Connecticut, it may not make sense to plan so aggressively because the state’s estate and gift tax exemptions are lower than the federal ones. (In Connecticut, those exemptions are set to become equal in 2023.)

James Dougherty, a partner in the private client and tax team at the law firm Withers Bergman, advises clients to not rush. “Take a break and leave room in your plan for changes,” he said. “Every day, the I.R.S. is inventing new ways to go after tax planning.”

What a Democratic president could do with a stroke of the pen is enforce a section of the Internal Revenue Code that ends valuation discounts for closely held family businesses. The Treasury Department and the Internal Revenue Service under President Barack Obama had proposed regulations that would have disallowed these discounts, which were seen as being overly generous when it came to estate planning.

A few months after taking office, Mr. Trump issued an executive order that told the Treasury Department to withdraw the regulations.

But advisers have pointed out that the statute eliminating valuation discounts remains on the books and is easy to reinstate. “Those regulations were shelved; they weren’t unwritten,” Mr. Pegg said. “You could reinstruct the secretary of the Treasury to propose them again, and they’d become law in the form of regulations.”

Eliminating valuation discounts also has support within the progressive wing of the Democratic Party. “If they have any way to scale back tax rules that benefit the 1 percent, they’re likely to do it,” said Bill Smith, managing director in the national tax office of at CBIZ MHM, an accounting firm. “This is certainly what they’d think of as a ‘1 percent rule.’ It isn’t, in my mind, because it affects all small business.”

The discounts were meant to be used by a private business that was owned by several family members. For example: Five people each own a 20 percent stake in a $100 million company. The difficulty they would have selling a stake to a nonfamily member meant it was not really worth $20 million.

Generally, 30 percent was considered a reasonable discount for this type of illiquidity. Some planners pushed the discount limit to 40 percent and beyond. A few egregious examples drew the ire of policymakers, like ones where a family partnership was created to hold a basket of marketable securities, whose value was easy to ascertain.

Ron Shepard, a small-business owner who lives in Orange County, Calif., is in the process of using various tax structures to pass his family business to his son and daughter. His business, Shepard Brothers, makes cleaners, sanitizers and water treatment products used for food safety.

“The tax implications are all part of that equation,” he said. The company is based in California, which has high state taxes on top of federal taxes.

The structures to protect those shares are also appealing to individuals. Irrevocable trusts, for example, can allow a business owner to give a share of a business at a discounted valuation and still have it protected from creditors. The business itself can be recapitalized so those shares do not carry a vote. This allows the business owner to have full control over day-to-day decisions while still saving on any future estate tax.

Mr. Shepard said it had taken him nearly 10 years to get to the point where he was ready to begin passing on the business. He realized that he could continue building the business himself and leave it to his children later. But he chose to include them while they were still young, a decision that helped the family build mutual trust, he said. That made the transfer easier.

“A lot of people will get the advisory side right, where they can put all kinds of things into all kinds of vehicles to protect it, but that doesn’t teach them how to spend the money,” he said. “The main thing I taught my kids about the business we have is you have to understand the asset and how it works because you’re going to own it one day, even if you don’t work in the business.”

That’s easier to plan for than what a tax rate is going to be and when.

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New Law Expands Uses for 529 College Savings Accounts

Tax-favored savings accounts known as 529 plans can help families save and invest to pay for college. But until now, the funds could not be used to repay student debt.

That changed as part of the Secure Act, a law attached to broader federal spending legislation enacted in December. The law was aimed mainly at adjusting the nation’s retirement system, but it also expanded allowable uses for 529 funds.

Under the new rules, up to $10,000 from a 529 account can be used to repay the beneficiary’s student loans. Plus, up to another $10,000 each can be used to repay student loans held by the beneficiary’s siblings. (If, say, a student had two siblings with student loans, another $20,000 total could be withdrawn, without penalty, to pay their debt.)

The new law also allows 529 funds to be used to pay for apprenticeships, which typically combine on-the-job training with classroom instruction, often at a community college. To qualify, the apprenticeship must be registered with the federal Labor Department.

The update is the latest expansion of permissible uses for the state-sponsored college savings plans. As of 2018, up to $10,000 a year per student can be used to pay for pre-college school tuition from kindergarten onward.

Money is contributed after taxes to 529 accounts, grows tax deferred and is withdrawn tax free when used for eligible expenses. (There is no federal tax deduction for 529 contributions, but some states offer tax breaks.) Earnings withdrawn for ineligible costs are subject to income tax, plus a penalty.

Before the recent spate of changes, 529 savings plans were limited to paying for costs like tuition, fees, housing, meal plans, books and supplies.

“We’re really excited about giving families more options for how they can spend their 529 funds,” said Michael Frerichs, the chairman of the College Savings Plans Network, a group that promotes the state-sponsored plans.

The inclusion of apprenticeship costs, in particular, may relieve some families’ concerns that opening a 529 fund may be a disadvantage if their child decides not to attend college, Mr. Frerichs said.

The new option for loan payments may seem odd because the main goal for saving in a 529 account is to avoid borrowing for college in the first place. And 529 rules allow an account’s beneficiary to be changed to another family member at any time. So extra cash can easily be reallocated to another student to help pay for college expenses.

But despite the best-laid plans, families — especially those with multiple children attending college — may find themselves with both “leftover” 529 funds and student loans, said Mark Kantrowitz, publisher of He recently discussed strategies for using 529 funds to pay student debt.

The new loan payment option can help in multiple situations — some of which may seem complex but are relatively common, Mr. Kantrowitz said. Say a family has several children, each with a separate 529 account. If a younger sibling attends a less expensive college and does not need the full balance in the account, the family could use the money to help pay down the student debt of the older sibling.

Students could also end up with “excess” 529 money if they graduated from college in three years instead of four, perhaps by taking summer courses or earning advanced-placement credit.

Students may also have to borrow unexpectedly, say, if generous grandparents mistakenly run afoul of federal student aid rules, Mr. Kantrowitz said. Money saved in a grandparent-owned 529 account does not affect a student’s financial aid eligibility while sitting in the account. But once withdrawn, the “distribution” counts as student income and can reduce the student’s eligibility for need-based aid by as much as half of the withdrawal. (Grandparents often own the accounts in their own names so they can meet the requirements for income tax deductions offered by some states for 529 contributions.)

One way to avoid that happening is to wait until January of a grandchild’s sophomore year to withdraw funds, Mr. Kantrowitz said. Because the federal aid application uses income from the prior two years, waiting will mean that no subsequent year’s financial aid eligibility will be affected (assuming the student graduates in four years). The student may have to borrow for the first three semesters. But later, under the new rule, $10,000 from the grandparents’ 529 fund can be used to help repay the debt.

“The Secure Act,” Mr. Kantrowitz said, “provides families with greater flexibility in spending 529 plan money.”

The College Savings Plans Network says there are about 14 million open 529 accounts holding an average of $25,000 each.

The average student loan burden for college graduates with debt is about $30,000. So $10,000 from a 529 account by itself is not going to solve the student loan problem, said Carrie Warick, director of policy and advocacy for the National College Access Network, a nonprofit group that advocates on behalf of low-income students. “If you have significantly greater than $10,000 in loans,” she said, “it’s not a game-changer.”

Here are some questions and answers about the new 529 rules:

Can I use 529 money to repay private student loans, as well as federal loans?

The provision applies to federal and most private student loans.

Can I use 529 funds to pay an education loan I took out for my child?

The Secure Act’s provisions apply to student loans held by the 529 account’s beneficiary or the beneficiary’s siblings. But there is a workaround, Mr. Kantrowitz said. For example, a parent, as the owner of a 529 account with a child named as the beneficiary, could make a change and designate himself or herself as its beneficiary and take a $10,000 distribution to repay federal or private parent loans.

Depending on how much money was left in the account, the family could first use $10,000 to repay a child’s loans and another $10,000 for a sibling’s loans, before making the beneficiary change and taking a distribution to repay the parent loan, he said.

When do the new 529 rules take effect?

The new 529 rules are retroactive to the beginning of 2019. But account holders may want to be cautious and check with their own 529 plan before withdrawing funds. The new rules are in effect for federal tax purposes, but it’s possible that some state 529 programs will not follow along and recognize student loan payments or apprenticeship costs as eligible expenses. (That happened with the earlier change that allowed 529 funds to be used to pay for pre-college education costs.) Account holders in states that do not go along with the new federal rules may be subject to state income taxes and penalties, or possibly a repayment of state tax breaks. The various 529 plans are evaluating the new law, Mr. Frerichs said, and it could be weeks or months before the issue is settled in each state.


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