Gift Tax Rules & Joint Bank Accounts

When you give a gift, the Internal Revenue Services reserves the right to take some of it as taxes. As of 2013, the top gift tax rate, which is the same as the estate tax rate, is 40 percent. However, you aren't going to be paying that tax on the jacket that you just bought your significant other. Two types of gift exclusions let many taxpayers escape the tax. First, you're allowed to give tax-free gifts of up to $14,000 per year to any one person in 2013. Second, as of 2013, you get to give an additional $5.25 million in gifts over the course of your life. If you go over the $14,000, though, you'll have to file a gift tax return to let the IRS know that you gave the gift and to either pay the tax or use some of your $5.25 million exemption. Both exclusions are also indexed for inflation, so they could go up or down in the future.

If you add someone to an existing account, that action could fall under the gift tax. Some portion of the value of that account is considered a gift. In states where joint owners can split off their rights from other joint owners, half of the value of the account would be considered a gift. In states where joint owners can't sever their interests, the value of the gift is based on how long the person you add will live relative to your life expectancy. You probably won't have to pay gift tax, though, unless you transfer more than $5.25 million worth of ownership. Also, if the share of the account that passes to the person you add is less than the annual exclusion ($14,000 in 2013), you won't even have to file a gift return.

An account, in and of itself, has no value. If you and your partner go to the bank and open a new account with little or no money, it's not a gift for tax purposes. When it becomes tricky, though, is if one of you deposits a lot of money and the other withdraws that money. If one account owner's withdrawals are more than his deposits by more than the annual gift tax exclusion, it could require filing a gift tax return.

Gift tax isn't the only problem that comes up when you open a joint account. When two of you share an account, you also share liability for the income tax on any interest that gets paid from the account or, if it's an investment account, for any dividends or capital gains that come from it. One option is to have the party who gets the 1099 form pay all of the taxes. That might not be the fairest one, but it's the easiest. Another is to have the party who gets the 1099 deduct half of the interest and make a note on his tax return to that effect and then have the other joint owner pay her fair share of the taxes on her share of the interest.