Common accounts are a nice and helpful invention. They are a great sign of value in a relationship that means: „mine is yours, and yours is mine“. Also they are very helpful for daily things like two incomes have to be arranged to pay the rent and Common expenses.
But as useful as they are as tricky they can be.
Accounts in common names are simply a typical step in a relationship which keeps growing. Spending time together, taking first vacation, rent a common apartment, buying together furnishing and putting together the bank accounts. It is a typical step which makes sense. Why having two bank accounts, when the rent of the common apartment must be paid anyway by both (or all) of the subjects living in it. It just makes things easier for the collective life, if the money is in one account and both have equal access to it.
Next logical step would be also to have a common savings account or investments.
If any simplifying taxation form for married couples can´t be used here, appears the next difficulty in form of to whom belongs the interests or capital gains. This type of question signs out the diversification of options which could be used in such a simple matter. One option can be to split the amount by a quote of 50/50, so that each individual has to opt half of income to his tax declaration. Another option could be found in a more logical base by the quote of founding the account from each person. So, each one has to tax the size of income by the amount of saving belonging to him.
So far, these are only the difficulties in taxation.
This aspect appears especially in cases when one person acts in its own interest or acts against the agreements. Every person which is a part-owner of any kind of common account has normally full access to it, if it is not otherwise described. Let me give you a tip at this stage, most banks prefer this wide and open form of common accounts. Why? Because for them it is way easier to handle with it.
Allow me draw a scenario as an example, there is a married couple and one day they decide to get divorced. Let’s imagine that one of them does not like this idea so much and wants to hurt the other, maybe by cashing the account. The account has a credit line of circa up to 10,000.
I think the possibility of this drawn example will be easy to imagine for most people. But the story doesn’t end here. If the bank wants the credit returned, then it normally holds the right to claim the full amount by just one owner of the account.
Of course most could think now, but this person has now the right to get back the half from the second account owner. This can be, by idea, solved by answering who transferred which amount in the account, for which reason was it forwarded and was it maybe a gift to the other or to who belongs the money?
Like You see, this situation opens a quite difficult dilemma, which can be handled, most likely, by an attorney and the whole process can take time.
This legal view takes us to a new question. How will the tax authority handle any transfer to the common bank account? Yes, one matter is taxation of any interests, but also any matter of a gift.
Any transfer could be seen as a gift of half amount to the other owner. Of course, there can be applied the tax allowance. As an example, I would like to orientate myself on the German system of taxation. In this case it would apply an allowance between married couples of 500,000 Euro. If the same couple isn´t married, it is only 20,000 Euro, both will be considered for a timeframe of ten years. With the last amount of allowance it is very likely to break through and be a cause of this taxation.
We just should be aware of the described facts to consider them in future decisions.
But as useful as they are as tricky they can be.
Accounts in common names are simply a typical step in a relationship which keeps growing. Spending time together, taking first vacation, rent a common apartment, buying together furnishing and putting together the bank accounts. It is a typical step which makes sense. Why having two bank accounts, when the rent of the common apartment must be paid anyway by both (or all) of the subjects living in it. It just makes things easier for the collective life, if the money is in one account and both have equal access to it.
Next logical step would be also to have a common savings account or investments.
Negatives of common accounts
So far, despite the positive outcome of Common Bank Accounts, there are first of all plenty of disadvantages, which can result from the decision of creating a joint account, and which should be taken into consideration in advance. Starting with the latest example, a common savings account, an obvious question which appears is the question about the taxation of interests or capital gains. Taxation can be tricky in every case, dealing with not married couples, because they can´t use any or several forms of taxation or deduction which could be applied for married couples.If any simplifying taxation form for married couples can´t be used here, appears the next difficulty in form of to whom belongs the interests or capital gains. This type of question signs out the diversification of options which could be used in such a simple matter. One option can be to split the amount by a quote of 50/50, so that each individual has to opt half of income to his tax declaration. Another option could be found in a more logical base by the quote of founding the account from each person. So, each one has to tax the size of income by the amount of saving belonging to him.
So far, these are only the difficulties in taxation.
Legal view
The legal aspect is another interesting view on common bank accounts and can be in fact as positive as also negative outcomes of it. The main questions will be to whom belongs a certain size of money and who has access / control over it. Available credit limits should be not forgotten.This aspect appears especially in cases when one person acts in its own interest or acts against the agreements. Every person which is a part-owner of any kind of common account has normally full access to it, if it is not otherwise described. Let me give you a tip at this stage, most banks prefer this wide and open form of common accounts. Why? Because for them it is way easier to handle with it.
Allow me draw a scenario as an example, there is a married couple and one day they decide to get divorced. Let’s imagine that one of them does not like this idea so much and wants to hurt the other, maybe by cashing the account. The account has a credit line of circa up to 10,000.
I think the possibility of this drawn example will be easy to imagine for most people. But the story doesn’t end here. If the bank wants the credit returned, then it normally holds the right to claim the full amount by just one owner of the account.
Of course most could think now, but this person has now the right to get back the half from the second account owner. This can be, by idea, solved by answering who transferred which amount in the account, for which reason was it forwarded and was it maybe a gift to the other or to who belongs the money?
Like You see, this situation opens a quite difficult dilemma, which can be handled, most likely, by an attorney and the whole process can take time.
This legal view takes us to a new question. How will the tax authority handle any transfer to the common bank account? Yes, one matter is taxation of any interests, but also any matter of a gift.
Any transfer could be seen as a gift of half amount to the other owner. Of course, there can be applied the tax allowance. As an example, I would like to orientate myself on the German system of taxation. In this case it would apply an allowance between married couples of 500,000 Euro. If the same couple isn´t married, it is only 20,000 Euro, both will be considered for a timeframe of ten years. With the last amount of allowance it is very likely to break through and be a cause of this taxation.
Conclusion
As great as this invention of common bank accounts is, as many difficulties they can cause. My recommendation is to rethink any possible option of common accounts and of how it could work without them. In this process should be considered the advantages and disadvantages of the choice, because it could be a great option to use a common bank account for the typical living expenses and keeping for each one a separate account.We just should be aware of the described facts to consider them in future decisions.
