Teaching your kids about savings is important. Helping them avoid unnecessary taxes is part of that. When you add a child as a joint owner of a savings account, she has access to funds you deposit. A joint account will have tax implications only if you deposit large sums of money -- or if you die.
Tax law allows you to give gifts of up to $14,000 per year, and up to $1 million over your life, without being taxed on the gift. While you can make unlimited gifts to your spouse or tax-exempt organizations, if you give too much to your child, you could wind up owing gift taxes on the amount. Fortunately, simply adding your child as a joint owner doesn’t constitute a gift. Once your child makes a withdrawal from the account, then you have made a gift. Requiring both of you to sign off on withdrawals can prevent you from making unintended gifts.
Interest income is attributed to each owner of an account in proportion to his ownership stake in the account. For most accounts co-owned by parent and child, usually only the parent’s Social Security number is on the account. The bank will then send the parent the Form 1099-INT showing the full amount of interest earned during the year. Unless your child made deposits to the account, you must report the entire amount on your taxes. If your child contributed a significant portion of the funds and you receive the Form 1099-INT, you can share the tax liability proportionally by filing a Form 1099-INT for your child’s share with both the Internal Revenue Service and your child.
When one owner of a joint account dies, the surviving owner needs to present the bank with the death certificate, and the bank will remove the deceased owner’s name from the savings account. When you add a child as joint owner, she will have ready access to account funds if you die. Because your deposits are only gifts when withdrawn by your child, however, any deposits you made that weren’t gifted to the child are included in your taxable estate for federal and state estate taxes.
The Internal Revenue Code doesn’t impose an inheritance tax on any inheritance received by survivors, but some states do. How much of the joint account is considered taxable inheritance depends on the particular state laws, but it could be as much as the entire amount you contributed. If you and your child were in Pennsylvania, for example, and had a joint account there when you died, only half the balance would be taxable inheritance, regardless of how much each contributed.
Sean Butner has been writing news articles, blog entries and feature pieces since 2005. His articles have appeared on the cover of "The Richland Sandstorm" and "The Palimpsest Files." He is completing graduate coursework in accounting through Texas A&M University-Commerce. He currently advises families on their insurance and financial planning needs.