A joint checking account means that you sign up with another person to own a checking account at a bank. A joint checking account is commonly used by married couples, though others can sign up for one. Legally, both parties have equal ownership rights to the account, which presents some dangers.
No Separation of Money
You should only sign up for a joint checking account if your motive is to actually share the money. Otherwise, keeping your funds separate can become an accounting and financial nightmare. If you deposit money into a joint checking account, the bank treats the funds as being equally owned by both parties. Thus, the other person has free reign to withdraw or write checks on your deposited funds. Even married couples face some risks as an unhappy husband or wife could clear out the checking account during a separation or after a break-up.
When you share an account, you also share potential financial claims on the account. A court judgment of liability or federal garnishment for taxes against your co-owner could expose money you deposit in the account to a risk of being seized. Additionally, you might have no debt, but if your co-owner does, creditors may come calling. Even if one party made all the deposits into the account, creditors of the other person can make claims on the funds.
Gift Tax Risks
If you have a joint account with a non-spouse, you also risk withdrawn funds being treated as "gifts" by the IRS. According to a May 2010 Bankrate.com article, anything over the IRS annual gifting limit is taxable income. The IRS gift tax limit was $14,000 as of 2013, according to the IRS website. Therefore, if you make $25,000 in deposits to the account, and your co-owner withdraws $20,000 at some point, $6,000 is treated as taxable income and must be reported by your co-owner.
Another major risk of joint accounts is that they are much easier to get into than to get out of. If you don't like the way the other person uses your funds, you can't simply go and ask the bank to stop the other person from withdrawing. The bank treats you as equal owners. To close a joint account, you typically need notarized signatures from both parties. If you break up with a boyfriend or girlfriend, getting his or her cooperation in closing an account is sometimes difficult.
- Bankrate.com: Risks of Joint Bank Accounts
- ACTEC Foundation: Joint Accounts: Dangers and Alternatives
- IRS: In 2013, Various Tax Benefits Increase Due to Inflation Adjustments
- Consumer Financial Protection Bureau. "I Have a Joint Checking Account. The Other Person Closed the Account Without Telling Me. Is That Allowed?" Accessed Feb. 26, 2020.
- Consumer Financial Protection Bureau. "I Have a Joint Account With Someone Who Died. What Happens Now?" Accessed Feb. 26, 2020.
- Nolo. "Bank Levies on Joint Accounts (Spouse)." Accessed Feb. 26, 2020.
Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.