Who Pays the Tax on a Joint Bank Account?


At the end of the year, taxpayers receive a Form 1099-INT that reports interest income from bank accounts. This interest income is included with other sources of ordinary income -- like wages and contractor income -- and is taxed at ordinary tax rates. If you own the account outright or own it with your spouse, the reporting is easy. It can become complicated, however, if you share the account with a relative or friend.

Name and SSN on Form 1099-INT

If you and another individual are both signatories on a bank account, it makes sense that you would split the interest income and the corresponding income tax. However, tax attorneys Robert Wood and Jamie Ogden say that's not necessarily how the IRS sees it. Generally, the bank will send the 1099-INT tax form only to the primary account holder, even if there is a co-account holder or co-signer. That means that the person whose name and Social Security number is indicated on the Form 1099-INT is responsible for the interest income.

Splitting the Income Tax

If you don't want one person to bear the burden of the income tax on a bank account, there is a roundabout way to split it. According to Wood and Odgen, the individual that receives the Form 1099-INT may choose to list an interest payment of half the amount of the interest earned to the other account holder. The individual may deduct the interest payment made to the co-account holder, which means that she's only responsible for tax on half of the income. The co-account holder is obligated to report the payment from the individual -- even if no Form 1099-INT is sent -- and will be liable for tax on the other half.

Foreign Bank Accounts

The interest-splitting issue becomes even more complex if you hold a joint foreign bank account with a non-U.S. citizen or resident. The IRS requires taxpayers to file a Report of Foreign Bank and Financial Accounts, which it abbreviates as FBAR, if the value of all their foreign accounts ever exceeded $10,000 during the year.

In Wood's Forbes.com article on the topic, he makes it clear that "if you are a signatory, you should file an FBAR." However, whether you need to report the interest as income, and how much you report, depends on who is deemed to own the account under local ownership law. The law can be quite complex, so it's best to consult an experienced tax accountant to determine how much to report.

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