Joint Bank Accounts; Taxation of Stock Profits; State Taxation of Pensions; Federal Tax Burden

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, October 3, 1999

Copyright 1999 Robert L. Sommers, all rights reserved.

Question: If I add my adult child’s name to our investment account as a joint tenant, have I made a gift and, if so, in what amount?

Answer: Adding a joint tenant to a bank or investment account is not a gift unless and until your child — or any donee (person receiving the gift) — withdraws money. Joint tenancy is a form of ownership in which the last surviving tenant receives the entire property. Because you may withdraw the entire amount at any time, no gift occurs until your child actually receives funds. Also, upon your death, the entire amount is part of your estate for estate tax purposes, unless the other joint tenant(s) can prove they made contributions to the account.

Note: The joint tenancy rules for California real estate are different. Creating a joint tenancy gives any tenant an immediate right to convert his interest to tenants in common. Tenants in common means an outright percentage ownership in the whole property. Consequently, if you add a joint tenant to real estate, you’ve made a gift.

The value of a gift of property is the donee’s pro-rata share of the property. For example, if a husband and wife add a child as a joint tenant, then the gift to the child would be one-third of the property, because three people own it. However, the gift’s value could be discounted (30% is typical), since, in reality, a one-third ownership in real estate is difficult to sell and the donee lacks management control over the property, which makes the interest less valuable.


Question: I purchased stock for $10,000, which has increased by $1,000. If I sell it, am I taxed on $11,000 or $1,000?

Answer: You are taxed on the $1,000 gain. To calculate gain or loss, subtract your basis ($10,000) from the amount realized ($11,000). The tax rate is established by the length of time you owned the stock. Ownership for one year or longer, produces a long-term capital gain, taxed at a maximum 20% federal (those in the 15% bracket pay a10% rate). Ownership for less than a year generates a short-term capital gain, usually taxed at ordinary income rates. California does not allow a capital gains break so you’ll pay state tax on the gain at your ordinary income rate.


Question: Does California tax my military pension?

Answer: Yes, if you are a California resident. Although Congress passed the Pension Income Tax Limits Act (PITLA) which prohibits a state from imposing taxes on certain retirement income (including non-military pensions) after December 31, 1995, this law is limited to non-residents.

Residency is determined by a variety of factors, the most important of which are: (1) where you live and work, and (2) the time you are physically present in the state. To avoid state income tax on your military pension, you must legally reside in a state that does not tax income, such as Nevada, Texas, Florida, Washington or Alaska.

Note: The PITLA applies to most pensions and retirement benefits received by non-residents, including many deferred compensation plans.


Question: What is the percentage of income paid by individuals in federal taxes each year.

Answer: For 1997 (most recent statistics available), IRS reports that taxpayers filed 122.5 million tax returns, reporting a total adjusted gross income (AGI) of nearly five trillion dollars. The income tax was $733 billion, or an average of 14.7% of AGI per taxpayer.

This tax burden is not distributed equally: Those earning between $100,000 and $200,000 received 14.2% of the income and paid $126 billion in taxes or 17.2% of the total. Taxpayers with an AGI greater than $200,000 received approximately 20% of the total income and paid $273 billion in taxes, or an average of 27.5%. In short, the top 5.8% of the income earners (those with AGIs of $100,000 or more) paid 44.8% of the taxes.

In contrast, taxpayers with an AGI between zero and $30,000 filed 57.8% of the returns and paid $52 billion in taxes, representing 7.1% of the total.




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