Who pays interest taxes on joint bank accounts?

There are plenty of advantages and disadvantages of joint bank accounts.

And, when you sign up for a joint bank account, the last thing you’re thinking about is how joint bank account taxes work.

In some cases, joint bank account taxes are straightforward to calculate, but in others, the process may be more complex.

Who is responsible for paying the taxes on earned interest in a joint bank account?

It depends on which account owner takes responsibility for the tax liability or if all account holders are paying their fair share.

Learn how taxes apply to joint bank accounts and how to address them when it comes time to your tax return.

How do taxes work for interest paid on joint bank accounts?

Banks are required to report interest earned on a bank account in excess of $10 each year to the Internal Revenue Service (IRS) using Form 1099-INT. Financial institutions, including any bank or credit union, issue Form 1099-INT to report the total amount of interest earned on the account.

Essentially, the IRS requires this so that people pay taxes on the interest they earn. Account statements provided by the financial institution can help account holders verify the interest earned and reported.

Many people would likely forget to report and pay taxes on this income without this form, which reflects the account-earned interest for the year.

For individual accounts

For a traditional bank account with just one owner, the process is easy.

If the interest paid exceeds $10 in a year, the bank issues a 1099-INT to the account holder. Then, the account holder reports that income on their income tax return, specifically on their individual tax return or own tax return.

Unfortunately, things get more complicated when a bank account is jointly held with more than one person.

For joint accounts

The Form 1099-INT only has space to list one recipient and Social Security Number for reporting interest income.

This means the financial institution cannot issue separate 1099-INT forms to each joint account holder. However, all account owners or co-owners are responsible for reporting their share of the interest income, even if only one receives the form.

Banks cannot send multiple 1099-INT forms reporting the total interest earned, as this would result in duplicate reporting, confusing the IRS and potentially causing two people to pay taxes on the same income.

So, what can the banks do?

The bank will likely issue a 1099-INT with the total interest earned in the year to the primary account holder. The nominee distribution process allows the primary account holder to allocate interest to other co-owners or joint owners for tax purposes.

The secondary or joint account holder likely won’t receive a 1099-INT from the bank.

Does that mean the person who receives the 1099-INT must pay all the tax on the interest income?

Reporting interest is a shared responsibility among all owners, including joint owners, co-owners, and account owners.

If you're married and filing a tax return jointly

If you’re married to a joint account holder and filing a joint tax return, the situation is easy. Married spouses or spouses who file jointly can report all interest income together on their joint tax return.

Simply take the reported income on the 1099-INT and put it on your joint tax return. If your total interest income exceeds $1,500, you may need to use Schedule B to report it.

Since everything is combined on your tax return, you’ll both end up paying the tax on the interest income together.

If you're married filing separately

Things get more complicated if you’re married but filing separate tax returns.

Because each spouse files a tax return separately, you’ll have to divide the interest income between the two joint account holders. Each spouse must report their share of interest income on their own tax return or individual tax return.

The IRS treats the division of income on joint accounts based on local laws. That means you need to know how your state divides assets.

Then, use those rules to determine who pays the tax and how much they pay.

For those who live in a community property state, the math is simple. Each person reports half of the interest income on their individual returns.

For those who don’t live in community property states, it’s a bit more complex.

You’ll have to divide the interest income based on your portion of account ownership throughout the year.

You’ll also need to alert the IRS that the person who received the 1099-INT isn’t reporting the full income on their return.

The IRS will need to know who is paying tax on the rest of the income.

You’ll learn exactly how to do this in a minute. This process often involves a nominee distribution, which is used to allocate interest income between spouses for tax purposes.

If you're not married

If you hold a joint bank account and you aren’t married, you don’t have to worry about community property laws. However, co-owners, joint owners, or other account holders must each report their share of interest income.

Instead, just pay taxes on the interest based on your portion of ownership of the account. Each account owner must report their share of the interest income on their own tax return.

Just like with those married filing separately, you’ll need to alert the IRS that the interest income will be reported on two tax returns.

This process involves reporting interest income among co-owners, and may require a nominee distribution to properly allocate the interest for tax purposes.

When one person receives interest on behalf of someone else, it’s called nominee interest.

The person who receives the interest has two choices on how to treat it as far as taxes go.

1. Take full liability for owed taxes

First, you can pay all the taxes on the interest earned, meaning you are responsible for the total amount of interest you earn interest on.

If the amount of interest reported on the joint bank account is low, paying the tax on the interest yourself may make sense.

You may pay a little bit more in taxes, but it makes life much easier. If you’re married or the joint owner is a loved one, it may not be worth the hassle.

By opting to pay taxes on the interest yourself, you don’t have to worry about filling out extra forms. The joint owner doesn’t have to pay any taxes on the interest, either.

That said, earning a hefty interest is possible if the account has a high enough balance.

In these cases, you may have to pay more than just a little tax on the interest income.

2. Split the tax liability

If this is your situation, you may want to split the income even if the joint owner is a family member or loved one.

To split the interest income, you’ll need to fill out a Form 1099-INT. This process is known as a nominee distribution, where you allocate the interest income to the appropriate account holder for reporting interest on their tax return. You will list your information as the payer and the joint owner’s information as the recipient.

You’ll list the joint owner’s interest income in box 1, interest income. Make sure you only list the portion the joint owner is responsible for, not the full amount.

This will let the IRS know you aren’t reporting the reported portion of the interest on your tax return. It also alerts the IRS that the joint owner and recipient of the 1099-INT will be reporting their share of the income on their tax return.

The form will need to be sent to the person receiving the interest (the joint owner) and to the IRS.

The IRS also requires you to file Form 1096, which is a summary of all 1099 forms you send to the IRS. You may also need to use Schedule B when reporting interest income from nominee distributions.

Joint bank account drawbacks

While joint bank accounts can make your life easier most of the time, they can also result in chaos. Not all joint accounts are created equal, and the risks can vary depending on the owners, such as family members or business partners.

The chaos can far exceed the minor inconvenience of figuring out who pays taxes on the interest. All co-owners, joint owners, or other account holders have full access to the money in the account, which can complicate how you manage money together.

Full control by all parties

When you sign up for a joint bank account, both people have 100% ownership over the account. This means both parties have full access to the account and can manage money as they see fit, including depositing, withdrawing, and overseeing the funds together.

That means they can empty the account, leaving you high and dry.

Joint bank accounts can also leave you in unanticipated sticky situations. Shared access requires careful management to avoid conflicts, as both account holders have 100% ownership and the assets in the account can be subject to many unanticipated issues.

Subject to bank levy and garnishment

If a joint account holder is sued, account holders have the right to 100% of the assets. Financial institutions, such as a bank or credit union, may be required to release the money in the account to satisfy legal claims.

This means the assets could be lost to the lawsuit even though you aren’t the one being sued.

Similarly, if a joint account holder gets behind on the debts or child support, the assets in the bank account might end up getting used to pay off a debt that isn’t yours. Credit unions follow similar procedures when handling garnishments or levies on joint accounts.

How does interest in custodian accounts work?

Thankfully, custodian account interest is much easier to deal with.

Custodian accounts are typically Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) accounts.

The interest, in this case, is easy because the child owns the account. That means the interest will be reported using the child’s Social Security Number, not the custodian’s.

Most children won’t have enough income to file a tax return so it won’t be an issue.

That said, your child may have to file a tax return and include income from 1099-INT forms if they have enough income.

Maximizing your financial strategy beyond joint accounts

As we navigate the complexities of joint bank accounts, especially concerning who is responsible for paying taxes on interest earned, it’s important to consider ways to optimize financial planning and enhance tax efficiency. Exploring various financial products, including joint brokerage accounts, can improve money management and offer more flexible options for shared finances.

Another valuable option is Individual Retirement Accounts (IRAs), which provide a powerful tool for retirement savings along with notable tax benefits. Whether managing a joint account or planning your financial future independently, gaining a clear understanding of IRA products and their interest rates is crucial for informed decision-making.

Summary

Figuring out how to report interest income from a joint bank account shouldn’t be too difficult.

If you don’t mind paying all the tax, the primary account holder can report all of the income on their return.

Otherwise, divide the income based on the rules for where you live. Then, report the nominee's income to the IRS using Form 1099-INT.

Even so, tax laws are extremely complicated.

It always helps to consult a tax professional about your particular situation.  

Tax professionals can examine everything going on in your life. Then, they can determine exactly how you should treat a particular source of income, like joint bank account interest, for tax purposes.

Frequently asked questions

Who gets the 1099 on a joint account?

The financial institution typically issues the Form 1099-INT to the primary account holder listed on the joint account. This person receives the form reporting the total interest earned for the year, even though all joint account holders are responsible for reporting and paying taxes on their share of the interest income.

Who pays tax on joint bank account?

All joint account holders are responsible for paying taxes on the interest earned according to their share of ownership. Typically, the primary account holder receives the tax form (1099-INT) reporting the entire interest, but each owner must report and pay taxes on their portion of the interest income on their individual tax returns or joint tax return if married filing jointly.

What are the disadvantages of a joint savings account?

Joint savings accounts have a few key drawbacks. Since both account holders have full access to the funds, there's a risk of disputes or unauthorized withdrawals, especially if trust is an issue. The funds are also vulnerable to creditors if one of the account holders has debt, as they can seize the money regardless of who contributed it. Finally, closing the account requires mutual consent, which can be difficult in a separation or disagreement.