In most states, the surviving spouse or co-owner of a joint checking account becomes the sole owner and is responsible for any income derived from interest earned on the account. The survivor also may be responsible for other taxes, including estate or inheritance taxes and gift taxes, depending upon the amount of the account and the total worth of the estate.
Joint Bank Accounts
Most joint bank accounts are established with an implied “Joint Tenant with Right of Survivorship,” or JT/WROS, understanding. This status usually applies unless the account is opened with an explicitly expressed clause stating otherwise. Each owner of a joint bank account — whether a savings account or checking account — can withdraw funds independent of the other person and without any co-signing stipulation. Upon the death of one joint owner, the other becomes sole owner of the account and may withdraw funds immediately and in any amount.
You must report to the IRS all income earned from a checking account. If the other owner was a spouse, you’ll simply continue including the interest earned on your income tax return — Line 2 on IRS Form 1040 EZ or Line 8a on IRS Form 1040. You may receive from your bank a copy of Form 1099-INT, indicating the interest earned on your account. Depending on the arrangement you had with the decedent owner regarding the checking account, you may be responsible for taxes for which you previously weren’t liable. If you and the decedent weren’t married, for example, and he was paying the taxes on all interest earnings, you’ll be responsible for future taxes as sole account owner.
Inheritance and Estate Taxes
Inheritance taxes are imposed on people, and estate taxes are assessed on estates as a whole. An inheritance tax is assessed on each individual beneficiary of an estate, usually through a will or through probate. Each person is responsible for the tax amount according to the amount at which his inheritance is valued. Inheritance taxes are administered by state law, not federal law. With estate taxes, an executor typically pays the appropriate amount of estate taxes owed from the total amount at which the estate is valued. Both the federal government and some states assess estate, or “death,” taxes. Depending on a state’s inheritance and tax laws and the amount of the estate, a surviving checking account co-owner who’s a spouse will be taxed at a lower rate, or not all, of the fair-market value of the account. A non-spouse may have the entire market value of the account included in the estate’s value or be taxed at the state inheritance rate. Another factor is the deceased’s will and provisions that may spell out the account co-owner’s inheritance and estate tax obligations.
Federal gift taxes don’t apply to joint checking accounts unless the deceased signed over the account to the other owner before his death. In that case, the surviving owner may be liable for gift taxes, depending on the amount of the account.
Federal and State Laws
The federal government, for 2011 and 2012, imposes a 35 percent tax on estates valued at $5 million or more. The rate increases to 55 percent in 2013 and the exemption drops to $1 million. Some states impose their own estate, inheritance and gift taxes. As of 2010, 11 states and Washington, D.C., impose estate taxes. Six states had inheritance taxes, two states had both inheritance and estate taxes, and two states imposed gift taxes. Tax exemptions in most states would usually render a joint checking account tax-free.