interest earned on a joint account

[glebvs]

Hi,

This is taking place in massachussetts.
There are joint bank accounts which earn interest (checking, savings, CD).
The first name on the account is of a parent who lives overseas and is a non-resident alien. The second name on the account is of a permanent resident in US.

The money added to these accounts all came directly from overseas by wire transfers from the parent.
The reason why the daughter's (second) name is added to the account is so that she can manage/access the account here since the parent overseas does not have such access and does not speak english. Daughter is over 21 y.o.

The parent does not have SSN or any other US identifier.
Does daughter need to pay taxes on income earned from these accounts? Why or why not?

Thank you.What is the name of your state?What is the name of your state?What is the name of your state?

 

[LdiJ]

Hi,

This is taking place in massachussetts.
There are joint bank accounts which earn interest (checking, savings, CD).
The first name on the account is of a parent who lives overseas and is a non-resident alien. The second name on the account is of a permanent resident in US.

The money added to these accounts all came directly from overseas by wire transfers from the parent.
The reason why the daughter's (second) name is added to the account is so that she can manage/access the account here since the parent overseas does not have such access and does not speak english. Daughter is over 21 y.o.

The parent does not have SSN or any other US identifier.
Does daughter need to pay taxes on income earned from these accounts? Why or why not?

Thank you.What is the name of your state?What is the name of your state?What is the name of your state?

Basically, yes. She is the US resident with the social security number, therefore the IRS is going to go after her to report the income and pay the tax. Now, if the parent has or obtains an ITIN number, the parent can report the income and pay the tax as a non-resident filer.

 

[glebvs]

Thanks for your reply.
I guess our confusion arose from these 2 facts:
1. as is stated on w-9, if the first name on the joint account does not have any SSN number, than the second account holder's number would be used in tracking the interest income.
2. seemingly contradicting fact is that even when an account is labeled as "joint" it does not necessarily mean that it is used by both people or that both people benefit from this income. My impression was that in this state (MA), there is a concept that the person who is actually using the account (i.e. depositing/withdrawing) money is considered to be liable. And, according to international treaties, foreign entities are not charged tax on US interest income if they can prove/establish their residence elsewhere.

You've said that "basically" the first point would be the ruling argument here. Which makes sense -- most contradictions in laws are interpreted to benefit the federal government.....

 

[LdiJ]

Thanks for your reply.
I guess our confusion arose from these 2 facts:
1. as is stated on w-9, if the first name on the joint account does not have any SSN number, than the second account holder's number would be used in tracking the interest income.
2. seemingly contradicting fact is that even when an account is labeled as "joint" it does not necessarily mean that it is used by both people or that both people benefit from this income. My impression was that in this state (MA), there is a concept that the person who is actually using the account (i.e. depositing/withdrawing) money is considered to be liable. And, according to international treaties, foreign entities are not charged tax on US interest income if they can prove/establish their residence elsewhere.

You've said that "basically" the first point would be the ruling argument here. Which makes sense -- most contradictions in laws are interpreted to benefit the federal government.....

Here is the way that it works:

The IRS has a system whereby they take all income that is reported to them (and that income would be reported to them) and matches it against tax returns that have been submitted to them.

If you don't include something on your return, and the joint holder does not file a return and report the income, then the IRS will be sending you letters asking for payment, including interest and penalties.

The odds of you being able to convince the IRS that its not your money, and therefore you aren't liable, are not strong. Tax treaties would not be relevant here because YOU, a US resident are named on the account.

What's more, you will have to go through the process on a yearly basis.

 

[tranquility]

2. seemingly contradicting fact is that even when an account is labeled as "joint" it does not necessarily mean that it is used by both people or that both people benefit from this income

.

Actually, I think it does. The right to withdraw is a legal concept in much of tax law. It is a big deal if a person has a right to a distribution from a trust--even if he doesn't take it. When a person has an unqualified right to money (aka constructive receipt) it is considered transferred and can be income--even if the check is not cashed or the withdrawal from the account is not made. Full rights to the money makes it yours.

However, many people have agreements, trusts if you will, where there is not an unqualified right to the money to one person. All kinds of legitimate reasons for this. There can be a shifting of duties and responsibilities in this situation.

But, let's get back to the core question. Is money earned in the U.S. going to be taxed by the U.S.?

Um...yes.

Even if you succeed in convincing the IRS this is a legal situation (were U.S. citizen is not a money service business falling under the reporting requirements), someone's going to have to pay on the income. The foreign national will need to file a return--although may get credit for foreign taxes paid. If there is a true claim of foreign national, there should be an amount withheld from interest unless Reg. Sec. 1.1441-1(i) is fullfilled:
(i) Portfolio interest described in section 871(h) or
881(c) and substitute interest payments described in Sec. 1.871-
7(b)(2) or 1.881-2(b)(2) are exempt from withholding under
section 1441(a). See Sec. 1.871-14 for regulations regarding
portfolio interest and section 1441(c)(9) for exemption from
withholding. Documentation establishing foreign status is
required for interest on an obligation in registered form to
qualify as portfolio interest. See section 871(h)(2)(B)(ii) and
Sec. 1.871-14(c)(1)(ii)(C). For special documentation rules
regarding foreign-targeted registered obligations described in
Sec. 1.871-14(e)(2), see Sec. 1.871-14(e)(3) and (4) and, in
particular, Sec. 1.871-14(e)(4)(i)(A) and (ii)(A) regarding the
time when the withholding agent must receive the documentation.
The documentation furnished for purposes of qualifying interest
as portfolio interest serves as the basis for the withholding
exemption for purposes of this section and for purposes of
establishing foreign status for purposes of section 6049. See
Sec. 1.6049-5(b)(8). Documentation establishing foreign status
is not required for qualifying interest on an obligation in
bearer form described in Sec. 1.871-14(b)(1) as portfolio
interest. However, in certain cases, documentation for portfolio
interest on a bearer obligation may have to be furnished in
order to establish foreign status for purposes of the
information reporting provisions of section 6049 and backup
withholding under section 3406. See Sec. 1.6049-5(b)(7).

 

[Dandy Don]

You may want to contact a CPA or tax accountant to ask about this, or call the IRS office for information about it. It seems like a Form 1099-R regarding the interest income would be sent to all parties who received the income, and you OR the parent who doesn't have the SSN needs to find out if they are required by IRS regulations to submit a tax return or if they are exempt from doing so, to get the matter cleared up once and for all.

 

[LdiJ]

You may want to contact a CPA or tax accountant to ask about this, or call the IRS office for information about it. It seems like a Form 1099-R regarding the interest income would be sent to all parties who received the income, and you OR the parent who doesn't have the SSN needs to find out if they are required by IRS regulations to submit a tax return or if they are exempt from doing so, to get the matter cleared up once and for all.

1099 R? Whether or not the income must be reported? This is interest income not a retirement account distribution, and one of the joint account holders is a US resident and their SS number is the SS number of record on the account.

 

[Dandy Don]

Seems like its unfair that only the holder of the SSN bears the burden for paying all of the taxes, and I just wanted the party to get a professional opinion to see if that is correct.