Couples and individuals use joint bank accounts as convenient tools for ordinary banking needs, adding to cash savings or earning interest on bank investment products. The Internal Revenue Service (IRS) views each individual on a joint account as a co-owner with equal rights of ownership. Regardless of the relationship between the two individuals, each owner bears an equal amount of responsibility in reporting and paying taxes
The IRS regards any interest, dividends or gains earned on cash or other assets held in a joint bank account as taxable income. Legally, each co-owner is responsible for paying taxes on half of the earned interest or gains. Common sources of taxable interest in a joint account are funds from interest earned on cash, certificates of deposit, bonds and money market accounts. Joint account owners receive a form 1099-INT from their bank in early spring outlining earned taxable interest above $10 from the previous calendar year.
Tax issues often arise from the death of the owners on a joint account. State laws vary regarding taxation and treatment of assets. In the majority of cases, the assets from the account transfer directly to the surviving spouse under rights of survivorship. This allows the account assets to transfer directly to the surviving spouse and avoid any tax complications with probate. If the living co-owner contributed to the joint account held with their spouse, half of the account balance is considered a portion of the deceased's taxable estate. For joint accounts held with a nonspouse, the entire account balance is considered a portion of the late owner's taxable estate.
Potential Tax Complications
For unmarried individuals filing separate returns, a joint bank account can unknowingly trigger a number of potential federal tax complications. For example, the federal gift tax allows individuals to exclude the first $13,000 of total personal gifts from taxation. Any gifts to individuals or charities outside the exclusion limits are considered taxable gifts by the IRS. Under these guidelines, withdrawals made from the joint bank account past the $13,000 limit would qualify as a taxable gift from the other owner of the account.
Making annual exclusion gifts or charitable donations from a joint bank account can simplify tax filing for married couples. To avoid surprises at tax time, unmarried couples should consult with an accountant to assess potential increases in tax liability resulting from a joint bank account. Before opening a joint bank account, discuss any outstanding tax liability or pending tax issues with the other co-owner. The IRS can legally levy a judgment on a savings account for a tax delinquent individual, regardless of whether or not both account owners are at fault.
- Bankrate.com; Risks of Joint Bank Accounts; Roxanne Hawn
- "Memphis Daily News"; Avoiding Joint Bank Account Risks; Ray and Dana Brandon; July 2010
- IRS.gov: Frequently Asked Questions on Gift Taxes
- Ohio State University: Co-Ownership of Personal Property
- Bank of America. "Our First Bank Account." Accessed April 20, 2020.
- Consumer Financial Protection Bureau. "A Closer Look: Overdraft and the Impact of Opting-In," Page 1. Accessed April 20, 2020.
- Code of Virginia. "§ 6.2-606. Ownership During Lifetime; Garnishment, Attachment, or Levy." Accessed April 20, 2020.
- Consumer Financial Protection Bureau. "Either Person on the Joint Account Generally Has the Right to Move Funds or Close the Account." Accessed April 20, 2020.
- University Credit Union. "Membership Agreement." Accessed April 20, 2020.
- BBT. "Bank Services Agreement," Page 7. Accessed April 20, 2020.
- Wells Fargo. "Opening and Closing Accounts Questions." Accessed April 20, 2020.
- GreenState Credit Union. "Closing Your Account." Accessed April 20, 2020.
- Suntrust. "Rules and Regulations for Deposit Accounts," Page 28. Accessed April 20, 2020.
- Bank of America. "Telling Your Bank It’s Over." Accessed April 20, 2020.
- Washington and Lee Law Review. "Virginia's Equitable Distribution Law: An Owner's Manual," Page 9. Accessed April 20, 2020.
Born in Chicago, Clare Archer has a background in art history, music, investing, travel and personal finances. She has written professionally since 2004 and her work has been published in publications such as "Creative Loafing" and Daily Kos. Archer holds a Bachelor of Arts degree in English with a minor in Economics.