05 Dec Will a joint savings account be considered a gift?

Q. I created a joint savings account. The co-owners are my daughter and myself. I am the only one who has funded the account. At what point is this considered a gift for income tax purposes?
— Looking for clarity

A. There are several reasons someone may co-own a bank account.

Perhaps an older parent adds an adult child to a bank account for help paying bills. Or maybe a parent adds a college-age child to a bank account to give the student access to cash while the parent can still monitor the account.

The law is well-settled on the gifting issue, said Andrew Novick, a certified financial planner and estate planning attorney with The Investment Connection and Brookner Law Offices in Bridgewater.

He said the IRS does not consider merely adding a second account holder to an existing account to be a gift. Similarly, there is no gift when a newly created joint account is funded by only one of the account holders.

“However, there is a gift once the joint account holder – the individual who hasn’t contributed anything to the account – withdraws funds from the account,” Novick said. “A gift is not income to the recipient and is not reported on the recipient’s income tax return. However, the person making the gift is responsible for any gift tax.”

Novick said the gift tax does not kick in until the annual gift exclusion and lifetime gift exemption are both exhausted.

Currently, the annual gift exclusion is $15,000 per recipient. This means that you can give up to $15,000 each year to an unlimited number of people with no gift tax liability or reporting requirement, Novick said.

In the case of a gift above the annual exclusion, you are supposed to complete a US Gift Tax Return – IRS Form 709 – but no gift tax will be due until the lifetime gift exemption – currently $11.4 million – is exhausted, Novck said.

Novick offered this example: Say your daughter withdraws $315,000 from your joint savings account. Tthe first $15,000 is excluded due to the annual gift exclusion. The remainder of the gift, $300,000, needs to be reported as a taxable gift. However, no gift tax is due because it just reduces your lifetime exemption from $11.4 million to $11.1 million. Until you use up your entire lifetime exemption, no gift taxes are due, he said.

“The IRS can impose penalties if they discover that you failed to file a gift tax return even if no gift tax was due,” he said.

Also remember that both the annual exclusion and the lifetime exemption are doubled if you are married, and married U.S. citizens can make unlimited transfers between themselves without worrying about the gift tax.

Novick said that although every situation is different, he doesn’t generally advise creating convenience joint accounts between non-spouses, especially if the account is sizeable or is an investment account.

“Convenience joint accounts often have unintended consequences, such as exposing the account to creditors of the joint account holder, giving the joint account holder unlimited access to the account, altering the inheritance plan of the original account owner as well as creating a variety of income, gift, and estate tax issues,” he said. “Instead, using a durable power of attorney is often a better option.”

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This story was originally published on Dec. 5, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.