What Are the Dangers of Joint Checking Accounts?

What Are the Dangers of Joint Checking Accounts?
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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.

Liability Risks

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If you have a joint account with a non-spouse, you also risk withdrawn funds being treated as "gifts" by the IRS.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.

Closing Difficulties

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.