Your Tax Questions, Answered
Who pays the tax on interest for a joint account? Is credit card interest deductible?
Elizabeth Carlassare
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Your Tax Questions, Answered
Today’s topic is your tax questions.I’ve received several recent questions about taxes, so I’d like to answer some of them in today’s episode.
Who Pays the Tax on Interest on a Joint Account?
Paul in San Antonio e-mailed me with this question:
My partner and I are not married. We are both, however, contributing a significant amount to savings and are thinking about creating a joint high-yield savings or checking account. We are both curious and concerned about the tax implications. In a situation like ours, who pays the taxes on interest earnings that are a result of our deposits?
Thanks for the question, Paul. So who does pay the tax on the interest on a joint account? The answer is, “It depends.”
Banks will send a Form 1099-INT to the first taxpayer named on the account. This information will also be reported to the IRS for that taxpayer. So if you’re the primary account holder, you’ll receive the 1099 and the IRS will look for the interest on your tax return unless you tell them otherwise.
If one of you is in a substantially lower tax bracket than the other, you may want to list that person’s name as the primary account holder so that they will receive the 1099. If you consider the person in the lower tax bracket to be the primary account holder, they’ll pay tax on all the interest at their lower tax rate, which would save money overall.
Although only one of you will receive the 1099, you and your partner can agree to each pay half of the tax that is owed on the interest. If you split the tax and only your partner receives the 1099, be sure to include a note with your tax return that gives your partner’s name and social security number, and indicates the portion of the interest each of you is paying tax on.
Is Credit Card Interest Deductible?
OK and now on to the next question. A listener named Santos e-mailed me and asks:
Can I deduct credit card interest?
The answer, unfortunately, is no. Credit card interest is considered personal interest by the IRS and cannot be deducted.
It’s for this reason that home equity lines of credit (also called HELOCs) are so popular. The money may be used for any type of expense and the interest is deductible. If you’re a homeowner with substantial credit card debt, you could use money from a HELOC to pay down your credit debt and then deduct the interest on the HELOC.
Interest rates on HELOCs are typically much, much lower than credit card interest rates, so this move can really be a money saver. The downside, of course, is that a HELOC is secured by your house, whereas credit card debt is unsecured. If you default on your HELOC payments, you could lose your house!
Interest on home equity debt is deductible as long as the amount of home equity debt is $100,000 or less.
Credit Cards image courtesy of Shutterstock