05/11/15 - Joint Ownership And Its Risks: Conclusion

Taxation of Joint Accounts

Jointly held property is very common, but its taxation is commonly misunderstood. On any joint account, the owner of the funds in the account is responsible for paying income tax on the account's earnings. Which of the joint owners receives the 1099 from the payer is not dispositive of who should pay the income tax. The bank will issue a 1099 to only one party, and the bank is not responsible for determining whose funds are in the account. It is up to the joint owners to properly report the income.

In order to avoid IRS matching problems, the taxpayer whose social security number appears on the account and 1099 should report all of the income on Schedule B (Form 1040), Interest and Ordinary Dividends. Below the entry, the taxpayer should subtract the amount attributable to the joint owner and provide the joint owner's name and social security number. That joint owner should report his or her portion of the interest.

For Pennsylvania inheritance tax, on the death of a co-owner of a joint account or any joint property, the taxable estate of the co-owner includes a fraction of the value of the property. The fraction is one divided by the number of co-tenants. For example, if three brothers are joint owners of an account, on the death of one of them, one-third of the value of the account is subject to Pennsylvania inheritance tax. Whose funds were contributed to the account are irrelevant for this purpose.

For Pennsylvania inheritance tax, joint property is taxable even if the decedent's name was added only for convenience. Assume Mother and Daughter are joint owners of an account, and one of them dies. One-half of the value of the account is subject to inheritance tax at the death of the first to die. It is important to note that even if all the money belonged to Mother, if Daughter dies first, Mother will have to pay inheritance tax on half of the value of the account. This is one of many reasons why joint property as an alternative to making a will is not such a good idea. This puts Mother in the position of having to pay inheritance tax to get her own money back. The only time this does not apply is if a child predeceases a parent before the child exceeds age 21.

Have a great week!

Patti