Taxes on a Joint Bank Account With Right of Survivorship

Joint bank accounts with right of survivorship allow survivors to avoid probate.

Joint bank accounts with right of survivorship allow survivors to avoid probate.

Many couples use joint bank accounts, with one spouse holding the right to sole ownership of the assets if the other spouse dies. This "joint with right of survivorship" feature can apply to two or more people. It provides a useful way for the survivor to avoid probate court, because the funds pass by default to the survivor. If the account has earnings, there can be some tax issues; estate taxes might come into play as well.

Ownership and Rights

A joint account means full legal ownership of assets for both account holders. That means either party can access the money and use it without restriction. This hold true whether or not there is a right of survivorship. In addition, creditors with a claim on the assets of one party can enforce court judgments by levying the account's non-exempt assets, even if the other account owner isn't a party to the debt.

Gift Taxes

Not all joint account owners are married to each other. You can set up a joint account with a sibling, a parent, or any other relatives, or with an unrelated friend or business associate. If you deposit enough money into the account, the IRS might consider that a "gift" to the other person, subject to the gift tax that would be levied on you. Although gifts to spouses aren't subject to the tax, giving more than $14,000 in any one year to another person is subject to gift tax on the donor at the rate of 40 percent. The IRS does offer a lifetime exclusion of $5.25 million (as of 2013) on the combination of gifts and transfers of assets from your estate.

Income Taxes

If the account generates income, the money is attributed to the person whose Social Security number was used to open the account. The bank will issue a 1099 statement to him, giving the full amount earned. As far as the IRS is concerned, he's liable for paying the income tax, unless he deducts a portion of the income and credits it to the other account holder.

Nominees and Income

To share taxable interest or dividends on a joint account, you must identify yourself as a "nominee" on Schedule B, which is used to declare the income to the IRS. List the name and Social Security number of the other person, and then deduct half of the amount from the total income received. The IRS is thus notified of taxable income belonging to the other account holder. If one of the account holders dies and the assets pass to the survivor, a final tax return must be filed for the deceased, with the taxable income still shared for that year.

 

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