Taxes From A To Z (2018): J Is For Joint Accounts

It’s my annual “Taxes from A to Z” series! If you’re wondering whether you can claim home office expenses or whether to deduct a capital loss, you won’t want to miss a single letter.

J is for Joint Accounts

Joint accounts often appear convenient but can be a real headache when it comes to taxes.

For federal income tax purposes, the treatment of joint accounts is determined by local law. That sounds confusing since this is a federal tax issue, but what it means is that you look to state law to determine your ownership interest.

This matters because a form 1099 will only report the name and Social Security Number (SSN) of one taxpayer: There isn’t room for a second (or third) taxpayer’s information. When the IRS gets the form 1099, they want to be able to match that name and SSN with income on a tax return. Here’s where it could get tricky.

When married taxpayers own a joint account and file a joint return, there’s no division of income necessary. Simply report the entire income amount on the joint return. No math, no harm, no foul.

For married taxpayers in a community property state who own a joint account and file separate returns, the math is also easy: each spouse reports one-half of the taxable income. If the income is not considered community property, each spouse must report their share of the income.

But what about when two or more taxpayers who are not married (or who are married but filing separately in a non-community property state) hold an account together? Depending on the relationship of the parties and the amount of the income, the taxpayer named on the form 1099 may wish to report all of the income and pay all of the tax. But in cases where that isn’t practical or feasible, the taxpayers must calculate the taxable portion for each party and report accordingly. Remember when I said that the form 1099 would only include one name and SSN? The IRS wants those forms to match your tax forms. That won’t happen if you divvy up the income and simply report separately. You’ll have to take some extra steps:

The taxpayer listed on the form 1099 should report the income.
The same taxpayer must issue the proper form (for example, a form 1099-INT for interest) showing the income received on behalf of the joint account holder to the joint owner.
Next, the same taxpayer must send paperwork to IRS (refer to the specific form instructions, so in the example above, check out the form 1099-INT instructions). That signals to IRS to expect two (or more) returns reporting the income. That’s a good thing because IRS likes to match income with names and SSNs. When income doesn’t match names and SSNs, it can cause your return to be flagged.

Sound confusing? It can be. There are many consequences (tax and otherwise) as a result of joint accounts so think long and hard before simply tacking on another name to your account.

Joint ownership is not appropriate when you merely want a convenience account, meaning that you want an adult child or another responsible party to make decisions for you, or have signature power on the account for bill-paying purposes. That’s more properly accomplished through a power of attorney. You’ll want to check with your tax or legal professional for more information.

For your taxes from A to Z, here’s the rest of the series: