Investing In Uncertain Times, Taxes and the IRS On ESPN Radio – April 29, 2016 Show

Topics Covered:

1. Mutual Funds Sour on Start-Ups Leaving the Entire On-line Gig Mostly Uber

2. Index Funds: We Know What Individual Investors Need to Know

3. Now that the “tax rush” is over, what should people do next?

4. Questions from our listeners:

• On the topic of mutual funds, what’s the difference between a closed end and an open ended fund? Can I purchase mutual funds for my retirement account?
• In 2015 I inherited a bank account and stocks. I received the statements from the foreign financial institution indicating the exchange rate they used was an average during the year. However to my understanding, we are to use the exchange rate reported by the Department of Treasury as of December 31, 2015. Which of these two exchange rates should I use? Also, do I need to file any form with IRS as well and if so what are the due dates?

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Jeff states: Good afternoon! Yes sometimes we just have to take the money and run!

Welcome to Inside Advantage – Your Financial And Tax Radio Show.
This is Board Certified Tax Attorney, Jeffrey B. Kahn, the principal attorney of the Law Offices Of Jeffrey B. Kahn, P.C. and head of the KahnTaxLaw team.

Gary states:

And this is Licensed Financial Planner, Gary Sussman at Trilogy Financial Services.
You are listening to our weekly radio show where we talk everything about finances and taxes from the ESPN 1700 AM Studio in San Diego, California.

Jeff states:

When it comes to knowing tax laws and paying taxes, let’s face it — everyone in the U.S. is either in tax trouble, on their way to tax trouble, or trying to avoid tax trouble!

Gary states:

And whether you are on the rebound or flying high, we have the information you need to make sound financial decisions and map out your strategy for success.

Jeff states:
Our show is broadcasted each Friday at 2:00PM Pacific Time and replays are available on demand by logging into the KahnTaxLaw website at www.kahntaxlaw.com.

Jeff states:

For today’s show we have coming up:

Segment 2 material: Index Funds: We Know What Individual Investors Need to Know

Gary states:

Also coming up is:

Segment 3 material: Now that the “tax rush” is over, what should people do next?

And of course towards the end of our show, we will be answering some of your questions.

Jeff starts chit chat with Gary.

Jeff states: So for today’s top story:

Mutual Funds Sour on Start-Ups Leaving the Entire On-line Gig Mostly Uber

http://www.wsj.com/articles/mutual-funds-sour-on-startup-investments-1457043892

http://blogs.wsj.com/economics/2016/03/28/the-entire-online-gig-economy-might-be-mostly-uber/

Jeff states: Giants among mutual funds have cut the value of their stakes in start-up companies at a faster pace, making fewer new investments along the way.

Gary replies: That’s right, Jeff. Mutual funds that once helped fuel the technology boom have been cutting back on new investments and slashing the value of current assets.

Jeff continues: Unfortunately, where there was once an outpouring of investments into new, promising companies that sent valuations soaring, while prompting subsidized hiring sprees and advertising binges, there now lies frugality.

Gary replies: With the “mutual-fund pullback”, this threatens to deepen a wider downturn that has already prompted falling valuations, milder ambitions and plenty of layoffs among start-up companies.

Jeff states: Start-up companies of all types are now focusing on the bottom line, at all costs, rather than placing any emphasis on growth. This not only hurts the company in terms of expansion but also cripples a new business in the early stages of establishing itself.

Gary states: At least 40 closely held start-ups valued at $1 billion or more a piece are part of various mutual funds held by advisory companies like BlackRock Inc, Fidelity Investments, T. Rowe Price Group Inc. and Wellington Management.

Jeff replies: At least one mutual fund firm values its investment at less than what it paid for thirteen of those start-ups. In fact, the valuation of those thirteen firms averages 28% below their original price.

Gary continues: We’re not talking about less-known companies here either. A few of these thirteen start-ups that are valued at 72% of their original price include mobile-messaging service Snapchat Inc, not-taking software maker Evernote, Inc. and health-insurance brokerage Zenefits.

Jeff states: Fund firms only bought ten new stakes in startup companies in the fourth quarter which is down from the second quarter high of 32, according to Dow Jones VentureSource.

Gary replies: These markdowns have continued to stun many venture-capital investors and further blindsided executives at startups.

Jeff continues: What’s the effect that we’re seeing? Lower valuations are making it more difficult for the little guy, meanwhile only easing up on the most successful companies.

Gary states: This additionally affects employee morale in the smaller start-ups. It makes it troublesome for the little guy to successfully attract new hires if their stock option packages are lacking.

Jeff replies: Let’s take a closer look with GGV Capital, for instance. GGV is a venture capital firm based in Menlo Park, here in California, and owns stake in the Web analytic firm Domo Inc. Domo Inc. has been marked down 16% by Fidelity since August.

Gary continues: Then you have Fantasy-sports company DraftKings Inc., which is also partly owned by GGV. DraftKings sank in valuation by an average of 72% in the fourth quarter. This was in addition to the headline of regulators having alleged it service constitutes illegal gambling.

Jeff replies: Domo Inc. didn’t respond to requests for comment on the matter.

Gary states: Likewise, DraftKings Inc. refused to comment on their markdown.

Jeff states: Now the idea behind valuation of a start-up or other non-traded stock is that, since these shares in private companies aren’t traded on the stock market, an estimate of their valuation would have to be reported. These mutual funds must approximate the amount each start-up is worth in a report every month or quarter.

Gary replies: This reversal in start-up funding began in the last half of 2015 with collapsing technology stocks. The resulting strenuous market for initial offerings to the public has deflated the optimism, when it had previously given a valuation of $1 billion to so may venture-capital backed private companies.

Jeff states: Getting into this year, Fidelity and funds advised by Wellington have thus far marked their estimated values of 13 different billion-dollar start-ups by at least 5%, according to the Wall Street Journal.

Gary replies: Alternately, not one start-up has been marked up by 5%, even though 14 start-ups had been marked up in value in the second quarter of last year.

Jeff continues: Which mutual-fund players are dealing heavily with start-up funding? Although their stakes are miniscule in comparison to the firms’ relative assets, BlackRock, Fidelity, T. Rowe Price and Wellington are a few of the key components of large investors associated with the start-up market, by dollars invested.

Gary states: To bring in more into perspective, representing 12% of start-ups total funding, they have gotten at least $3.8 billion solely from Fidelity and T. Rowe Price.

Jeff replies: Plainly explained by an article in the Wall Street Journal, “mutual funds depend on a vibrant IPO market to cash in on their private-company investments, usually made by buying stock directly from start-ups.

Gary states: Now although last year 16 US based venture back companies had IPOs (down from 30 in 2014), no additional start-ups have gone public this year.

Jeff states: The biggest influence of this behavior is that the current volatility of the stock market has likely cut-off the flow of IPOs to these companies. Start-ups don’t want to be introduced to the public at a low price, it’s bad for business.

Gary replies: And again, the market is taking notice. In fact, the Nasdaq Composite Index has been down roughly 6% or more so far this year.

Jeff replies: Even still, Americans are still getting their piece of private high-tech companies through their mutual funds. Even last year, 45% of the funding rounds that valued US-based, venture back start-up at $1 billion or more included a mutual fund, according to securities filing data from Dow Jones VentureSource.

Gary continues: Take Fidelity for example. They funneled at least $106 million into the San Francisco private venture Zenefits, last May. Fidelity acted as the lead investor in a funding round that ballooned the company’s valuation to $4.5 billion.

Jeff replies: The next day, after broadcasting its success, Zenefits began its recruiting to potential new employees. However, later last year, in September, Fidelity marked down its Zenefits stake by 48%.

Gary continues: This cut from $14.90 a share down to $7.74 left the company’s adjusted valuation at $2.3 billion and Zenefits founder Parker Conrad stunned.

Jeff states: What’s more is that, in November, the company was falling short of its revenue target and had begun curbing expenses. Conrad subsequently resigned this February after coming under fire.

Gary continues: Meanwhile, last week, Zenefits fired 250 people, or what amounts to a layoff of 17% of its workforce. When prompted, Zenefits declined to comment.

Jeff replies: What happened?? Zenefits called the mutual fund giant, requesting an explanation, and even questioned Fidelity portfolio manager Steven Wymer at a Zenefits board meeting.

Gary states: However, the only response that was given was the remark from a Fidelity spokesperson, explaining that an independent committee sets valuation for private-company investment, not portfolio managers.

Jeff continues: This isn’t the only instance in which Fidelity has under valuated one of its ventures, from its original stake. For example, they have also slashed their valuation in MongoDB, the software company.

Gary states: To be more precise, Fidelity cut its valuation in MongoDB in eight of the last nine quarters since December 2013. The current value of the shares is 58% below what Fidelity had initially paid for it.

Jeff replies: On a lighter note, the software company reportedly doubled its revenue to roughly $100 million last year. Fidelity estimates MongoDB’s stock is worth $6.98 a share.

Gary states: But Fidelity Investments are explaining it differently. They’re explaining that the reason why fewer new investments are being made is that they “couldn’t meet mutually acceptable terms as often” with a start-up.

Jeff replies: If we look at the data, it seems to be the case. Fidelity’s new investments fell to six in the fourth quarter from nine in the third. Considering they took stakes in sixteen new start-ups in last years’ second quarter, this is big.

Gary continues: Now a venture that Fidelity did take stake is Snapchat, at an investment of $175 million in February. The mutual fund firm invested at the same price per share as it did in March of the previous year.

Jeff states: In the fourth quarter, T. Rowe Price acquired two new ventures in startups, down from the previous two quarters at five a piece.

Gary continues: Wellington also made new investments but the two it made were the lowest since the first quarter of 2014.

Jeff states: Which is far better in comparison to new investments in startups by BlackRock mutual funds. BlackRock made a whopping zero new investments in the fourth quarter.

Gary states: Now this isn’t to say that mutual funds themselves are preforming terribly. Analysis from the Wall Street Journal see that “mutual-fund firms remain far ahead in paper profits on most of their stakes in privately held billion-dollar companies.”

Jeff replies: In fact, mutual funds that have investments in the increasing popular Uber (car service) Technologies Inc. at $15.51 per share, have seen their value in that stock triple.

Gary states: Other startup companies are itching to copy the “Uber” business model of using an app to connect an on-demand service to the summons of a client, to a wider range of industries. However, few businesses are failing to mirror this successfully.

Jeff states:

Well it’s time for a break but stay tuned because we are going to tell you what individual investors need to know about index funds.

You are listening to Board Certified Tax Attorney, Jeffrey B. Kahn, and Licensed Financial Planner, Gary Sussman on Inside Advantage on ESPN.

BREAK

Welcome back. This is Inside Advantage – Your Financial And Tax Radio Show on ESPN and you are listening to Board Certified Tax Attorney, Jeffrey B. Kahn, and Licensed Financial Planner, Gary Sussman.

Jeff states: And before we start this next segment, Gary would you like to remind our listeners of your offer.

Gary PLUG: Trilogy Financial Services. We will provide you with a retirement cash flow analysis which is a $600.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Gary Sussman. The number to call is 858-755-6696 x 3115. That is 858-755-6696 x 3115. Or visit www.guideyourstory.com.

Index Funds: We Know What Individual Investors Need to Know

www.wsj.com/articles/dont-assume-index-funds-will-always-save-you-money-1460712607

Jeff starts: Fugal investors have traditionally relied on index funds to save them money, but this isn’t the case as some funds are fairly expensive for the type of exposure they provide.

Gary replies: On average, compared to funds whose managers select individual securities, index-tracking funds statistically are cheaper. For instance, actively-managed funds tend to run at a higher 1.22% whereas index mutual funds run about 0.67%, according to Morningstar Inc.

Jeff replies: But Morningstar analyst, Alex Bryan, even explains that alternately “there are cases where you have index funds that are very expensive for the type of exposure they’re offering, and there are certainly active funds that are very cheap.”

Gary continues: So we’re going to take this time to dive a bit deeper into some of the most expensive index US stock funds and some of the lowest-cost actively managed ones.

Jeff states: On the expensive indexing end of the spectrum, Rydex S&P 500 fund which holds the largest share class of $307 million, charges 1.58% in annual expenses. Now the fund gained on average 9.9% a year over three years in data collected April 13, trailing behind the 11.8% gain of the S&P 500.

Gary replies: A Guggenheim Investments spokesperson, who offers the Rydex funds, says that the reasoning behind the cost of the fund is that it’s designed for tactical fund traders and is priced twice per day.

Jeff continues: Once more, the Green Century Equity Fund of $164 million, has an expense ratio of 1.25% for its MSCI Inc. index. The funds extensive screening process for environmental, social and governance criteria, is one of the primary factors that causes it to be more costly than other indexes.

Gary states: The pay-off for a fund that accrued fees for the fiscal year through July, equal to 0.06% of its July 31st assets, is an average gain of 11.3% over the last three years, in a Morningstar Report.

Jeff replies: The $172 million Victory CEMP US 500 Enhanced Volatility Weighted Index Fund’s cap is set at .99% by their Victory Management Inc. until at the very least October 31, 2017.

Gary continues: But the expenses on the Victory fund would be a higher rate of 1.22% if it were not for the subsidy. This “fund tracks a benchmark, created by a company that Victory Capital acquired, that adjusts its stock-market exposure in an effort to limit loses in a down market,” the Journal explains.

Jeff states: The head of investment solutions, product and strategy at Victory Capital, Mannik Dhillon, expands that the fund is “appropriately priced compared with other “alternative indexing” funds.

Gary continues: That particular fund gained 9.8% on average for its investors over the last three years, as well.

Jeff states: ETFs which have been known for their low-fee structure can be found more costly in actively managed mutual funds.

Gary replies: These $3.4 billion charge 0.89% by tracking and index belonging to Dorsey, Wright & Associates, a NASDAQ unit. This unit, known for technical analysis, aimed to identify the five sector ETFs from First Trust Advisors LP, hands down have the greatest performance potential, according to the Journal.

Jeff continues: This ETF, originally launched in 2014, showered 10.4% per annum in the twelve months ending April 13th, Morningstar reports.

Gary states: But what make up the low-cost active funds? Vanguard has historically been known for their low costs funds and is the first topic of conversation for us on this topic.

Jeff replies: That’s right Gary. The index investing pioneer, Vanguard Group, offers some pretty inexpensive actively managed funds. The Vanguard Equity Index Fund which holds $20.2 billion, invests typically in US companies that provide consistent dividends.

Gary continues: The Vanguard Equity Index Fund has an expense of just 0.26% that covers the basic Investor shares. When you graduate to meet the $50,000 minimum on its Admiral Shares level, that fee drops to 0.17%.

Jeff replies: That’s great, when you consider that the fund gained 10.5% a year on average over the last three years.

Gary states: Now if we’re talking inexpensive actively managed US stock funds, we can also look toward Vanguard for their $5.8 billion Vanguard Strategic Equity Fund and the $1.3 billion Vanguard US Value Fund.

Jeff continues: The Strategic Equity Fund charges 0.21% for the base Investor shares while the US Value Fund comes in at 0.26%.

Gary states: Let’s look outside Vanguard, though at the $53.8 billion Dodge & Cox Stock Fund. This fund deals primary with large stocks that have been said to be undervalued. But at an expense of 0.52%, while gaining an average of 9.9% over the last three years, they’re not a bad choice.

Jeff replies: Finally, the $6.6 billion Primecap Odyssey Growth and sister, $5.6 billion Primecap Odyssey Stock, are good bets, not to mention the Prime cap Management Co also manages funds for Vanguard (even if they’re currently closed to investors).

Gary states: The Odyssey Growth expenses 0.64%, while the Odyssey Stock runs 0.65%. Over the past three years, both funds rose nearly 12% a year on average. So if you need a little more guidance on the good versus the ugly in funds for your IRA or brokerage accounts, give us a call at….

Gary PLUG: Trilogy Financial Services. We will provide you with a retirement cash flow analysis which is a $600.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Gary Sussman. The number to call is 858-755-6696 x 3115. That is 858-755-6696 x 3115. Or visit www.guideyourstory.com.

Jeff states: Stay tuned because after the break we are going to discuss now that the “tax rush” is over, what should people do next?

You are listening to Board Certified Tax Attorney, Jeffrey B. Kahn, and Licensed Financial Planner, Gary Sussman on Inside Advantage on ESPN.

BREAK

Jeff states: Welcome back. This is Inside Advantage – Your Financial And Tax Radio Show on ESPN and you are listening to Board Certified Tax Attorney, Jeffrey B. Kahn, and Licensed Financial Planner, Gary Sussman.

Calling into the studio from my Walnut Creek Office is my associate attorney, Amy Spivey.

Chit chat with Amy

Jeff states: And as always I want to remind our listeners of my offer PLUG:

The Law Offices Of Jeffrey B. Kahn, P.C. will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Jeff states: So now that the “tax rush” is over, what should people do next?

Now is a Good Time to Plan for Next Year’s Taxes

Gary states: You may be tempted to forget about your taxes once you’ve filed but some tax planning done now may benefit you later. Now is a good time to set up a system so you can keep your tax records safe and easy to find. So let’s hear from Jeff and Amy on some tips to give you a leg up on next year’s taxes.

[Gary to read off each tip followed by Amy explanation and Jeff comment.]

1. Take action when life changes occur. Some life events can change the amount of tax you owe. Examples include a change in marital status or the birth of a child. When these happen, you may need to change the amount of tax withheld from your pay. To do that, file a new Form W-4, Employee’s Withholding Allowance Certificate, with your employer.
2. Report changes in circumstances to the Health Insurance Marketplace. If you enroll in insurance coverage through the Health Insurance Marketplace for 2016 coverage, you should report changes in circumstances to the Marketplace when they happen. Report events such as changes in your income or family size. Doing so will help you avoid getting too much or too little financial assistance.
3. Keep records safe. Print and keep a copy of your 2015 tax return and supporting records together in a safe place. This includes W-2 Forms, Forms 1099, bank records and records of your family’s health care insurance coverage. If you ever need your tax return or records, it will be easier for you to get them. For example, you may need a copy of your tax return if you apply for a home loan or financial aid for college. You should use your tax return as a guide when you do your taxes next year.
4. Stay organized. Make tax time easier. Have your family put tax records in the same place during the year. That way you won’t have to search for misplaced records when you file next year.
5. Shop for a tax preparer. If you want to hire a tax preparer to help you with tax planning, start your search now. Choose your tax preparer wisely. Use the Directory of Tax Return Preparers tool on IRS.gov to find tax preparers in your area with the credentials and qualifications that you prefer.
6. Think about itemizing. You may be able to lower your taxes if you itemize deductions instead of taking the standard deduction. Owning a home, paying medical expenses and qualified donations to charity could mean more tax savings. See the instructions for Schedule A, Itemized Deductions, for a list of deductions.
7. Stay informed. Subscribe to IRS Tax Tips to get emails about tax law changes, how to save money and much more. But most people are probably not comfortable giving their email address to IRS and receiving emails from the IRS so better yet listen to our show as just like today, we provide you with the tips and facts to stay informed.

Jeff states: So if you are in the group that filed extensions, what’s the smartest thing to do?

Tips for Those Who Missed the Tax Deadline.

Gary states: Monday, April 18, was the tax deadline for most people in 2016. If you didn’t file a tax return or an extension to file but should have, take action now. So what tips do Jeff and Amy have if you missed the tax filing deadline.

[Gary to read off each tip followed by Amy explanation and Jeff comment.]

1. File and pay soon. If you owe taxes, you should file and pay as soon as you can, which will stop the interest and penalties that you will owe. IRS Direct Pay is a free, secure and easy way to pay your balance due directly from your checking or savings account. Remember the IRS will not charge a penalty for filing a late return if you are due a refund. The sooner you file, the sooner you’ll get your refund.
2. Use IRS Free File. Nearly everyone can use IRS Free File to e-file their federal taxes for free. If your income was $62,000 or less, you can use free brand-name tax software. If you made more than $62,000, use Free File Fillable Forms to e-file. This program uses electronic versions of IRS paper forms and does some of the math for you. Fillable forms work best for those who are used to doing their own taxes. Either way, you have a free option on IRS.gov through the Oct. 17 extension period.
3. IRS e-file is safe and quick. No matter who prepares your tax return, you can use IRS e-file through Oct. 17. E-file is the easiest, safest and most accurate way to file your taxes. The IRS will send you electronic confirmation when they receive your tax return, and they issue more than nine out of 10 refunds in less than 21 days.
4. Pay as much as you can. If you owe but can’t pay in full, you should pay as much as you can when you file your tax return. IRS electronic payment options are the quickest and easiest way to pay your taxes. You should pay what you owe as soon as possible to minimize penalties and interest
5. Make monthly payments through an installment agreement. If you need more time to pay your taxes, you can apply for an installment agreement through the IRS. But because each person’s situation is different and there are different types of payment plans, if you are looking to make the lowest monthly payment possible, you would be best served by seeing us first. If you have other years that you also owe, we can roll those liabilities into the payment plan and see if you even qualify to settle your liabilities at a discount with an Offer In Compromise.
6. A refund may be waiting. If you are owed a refund, you should file as soon as possible to get it. Even if you are not required to file, you may still get a refund if you had taxes withheld from your wages or you qualify for certain tax credits like the Earned Income Tax Credit. If you don’t file your return within three years, you could lose your right to the refund.

Jeff states: Like we said, April 18th was this year’s deadline for most people to file their federal tax return and pay any tax they owe. If you are due a refund there is no penalty if you file a late tax return. But if you owe tax, and you failed to file and pay on time, you will most likely owe interest and penalties on the tax you pay late.

Things You Should Know about Filing Late and Paying Penalties

Jeff states: To keep interest and penalties to a minimum, you should file your tax return and pay the tax as soon as possible. So what penalties apply if you file late and owe the IRS?

Jeff continues: Two penalties may apply. One penalty is for filing late and one is for paying late. They can add up fast. Interest accrues on top of the penalties.

1. Penalty for late filing. If you file your 2015 tax return more than 60 days after the due date or extended due date, the minimum penalty is $205 or, if you owe less than $205, 100% of the unpaid tax. Otherwise, the penalty can be as much as five percent of your unpaid taxes each month up to a maximum of 25%.

2. Penalty for late payment. The penalty is generally 0.5% of your unpaid taxes per month. It can build up to as much as 25% of your unpaid taxes.

Jeff continues: But where you know you are going to owe the IRS or any State Tax Agency, it’s best to get a plan in place on how to address payment of these liabilities BEFORE you file your income tax return which is why …

PLUG: The Law Offices Of Jeffrey B. Kahn, P.C. will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Thanks Amy for calling into the show. Amy says Thanks for having me.

Stay tuned as we will be taking some of your questions. You are listening to Board Certified Tax Attorney, Jeffrey B. Kahn, and Licensed Financial Planner, Gary Sussman on Inside Advantage on ESPN.

BREAK

Jeff states: Welcome back. This is Inside Advantage – Your Financial And Tax Radio Show on ESPN and you are listening to Board Certified Tax Attorney, Jeffrey B. Kahn, and Licensed Financial Planner, Gary Sussman.

And Gary and I are always pleased to make our offers to our listeners where… PLUG: The Law Offices Of Jeffrey B. Kahn, P.C. will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Gary states: Windus PLUG: Trilogy Financial Services will provide you with a retirement cash flow analysis which is a $600.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Gary Sussman. The number to call is 858-755-6696 x 3115. That is 858-755-6696 x 3115. Or visit www.guideyourstory.com.

You should also know that the securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. Additional advisory services offered through Trilogy Capital, a Registered Investment Adviser. Trilogy Capital and NPC are separate and unrelated companies.

Jeff states: If you would like to post a question for us to answer, you can go to my website at www.kahntaxlaw.com and click on “Radio Show”. You can then enter your question and maybe it will be selected for our show.

Jeff and Gary discuss impact of one exceeding the Social Security Wage Limit of $118,500.00. Consider using the 6.2% social security tax savings as additional withholding income tax or take that money and invest it.

OK Gary, what questions have you pulled for us to answer?

Question from Eric in San Diego: On the topic of mutual funds, what’s the difference between a closed end and an open ended fund? Can I purchase mutual funds for my retirement account?

Gary Answers.

Question from Douglas in Newport Beach: In 2015 I inherited a bank account and stocks. I received the statements from the foreign financial institution indicating the exchange rate they used was an average during the year. However to my understanding, we are to use the exchange rate reported by the Department of Treasury as of December 31, 2015. Which of these two exchange rates should I use? Also, do I need to file any form with IRS as well and if so what are the due dates?

Jeff Answers:

In the case of non-United States currency, convert the maximum account value for each account into United States dollars. Convert foreign currency by using the Treasury’s Financial Management Service rate (select Exchange Rates under Reference & Guidance at www.fms.treas.gov) for the last day of the calendar year.

You may be required to file Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. This includes inheritance from a foreign estate. The due date of this form is the same as the due date for your Form 1040.

As a U.S. person you are required to file an FBAR and Form 8938 if the account/asset is above the applicable thresholds. The larger concern for you is whether the foreign investments you inherited are “U.S. tax friendly”. Do you have any foreign mutual funds? The IRS specially taxes these investments under the PFIC rules. Not many tax preparers are aware of these rules and I have not met any lay person who correctly applied them using tax software.

Jeff states: Well we are reaching the end of our show.

Remember you can send us your questions by visiting the kahntaxlaw website at www.kahntaxlaw.com.

Gary states: Have a great day everyone!