“What’s mine is yours.” It’s a lovely sentiment, isn’t it? But it can also be complicating, especially when it comes down to money.
You might be thinking of opening a joint account with your life partner or a close family friend. Joint bank accounts can make life a lot easier: Pooling your resources together can help you weather all kinds of crises, but if you don’t manage your account right you could be facing a major financial crisis sometime in the future. At Hacker Accounting we know all about the benefits and drawbacks of getting a joint account. Here’s a few ways that a joint bank account could have an affect on your taxes.
Who Pays The Taxes On A Joint Account?
Both owners of the joint account pay taxes on it. They’ll pay taxes on the income generated in proportion to their ownership share. You can usually prorate the income by using each joint owner’s percentage of the total account.
Form 1099 is the proper form IRS uses for reporting interest income you earn by a joint account. These can be tricky to prepare. Only one person and one Social Security number can show on the form. That person is usually the first person you list on the joint account. All the reported income to the IRS is for that one joint account holder.
The joint owner listed on the 1099 has to report all the income of their tax return. They then have to deduct the shares of the other joint owners and make a note about it on the tax return. This note will list the other joint account holders, their respective shares and Social Security numbers and the states that they will be reporting their share of the income on their returns. Whoever fills out the 1099 needs to send out a copy to all the other joint owners, along with an income breakdown for each owner.
One of the potential pitfalls of joint bank accounts is that in addition to sharing funds and resources you’ll also be sharing any troubles that arise from your accounts. If you get sued, the money in your joint account be be seized as a personal asset even if most of the money came from the other account holder. And if your partner ends up defaulting on a loan that used your account as collateral, it’ll affect your credit rating too!
In tax terms this means that any penalties or audits or fines that are brought to bear on your joint account affects you. Even if the punitive actions are happening because of something someone else on the account did, they still consider you a responsible party because of your involvement with the account,
Related: How Health Benefits Affect My Taxes
Got any questions about your joint bank account? Give Hacker Accounting a call at 602-375-5254.