Dad’s Money Yours for the Taking? Maybe So, but the IRS Is Watching

Q: Three years ago, my father made his bank account joint by putting my name on it. He is now 89. Recently, I took all the money out and put it in my name only. I was told I had to file a gift tax return because the amount was more than $10,000. Is this correct, even though the account was in both names?

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A: A gift tax return needs to be filed. But more important, just what the heck do you think you’re doing?

Most parents put an adult child on their accounts so that someone will be able to pay the bills if the parent becomes incapacitated. It’s not an invitation to raid the piggy bank.

(Some parents also use joint accounts to avoid probate, the often costly court process that ensues after a death. That may not be the smartest idea; it’s just as easy to make the account a “pay on death” account and name the children as beneficiaries. That avoids both probate and the possibility that your child will do what this one has done.)

Creating a joint bank account is not in itself considered a gift. But your taking money out of the account is. Any withdrawal greater than $10,000 requires that your dad file a gift tax return, and the excess is subtracted from your father’s estate tax exemption. If the account had $50,000 in it, then a gift tax return should be filed declaring a $40,000 gift, and that amount is subtracted from the $650,000 that is now allowed to be passed to heirs without estate taxes.

Whatever your motivation, your transfer has potentially serious tax and estate-planning repercussions. You should consult a tax expert about what to do next.

Protest and See Where It Gets You

Q: There’s a man advertising a $5,000 reward to anyone who can cite a specific law requiring Americans to pay income taxes. Is there such a law?

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A: Tell you what. If a review of the 16th Amendment isn’t enough for you, then go ahead and stop paying taxes. After the IRS has taken your home, your business and your life savings, you can form a study group with the other tax protesters in prison and debate the fine points. Me? I’m going to ante up. See the next letter.

Capital Gains Tax Is True to Form

Q: I understand that Congress created a new 20% maximum capital gains tax, but where does it show up in the current 1040 form or Schedule D? I prepared the form but could not find anywhere where I would receive the 20% consideration. I paid my tax, but I think I overpaid.

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A: You’re not alone. The Times has received several letters from readers wondering if the 54-line Schedule D was just a plot to keep them busy while the government raided their pockets. But if you went through each step of Schedule D and double-checked your math, you’re probably OK. You’ll find your 20% rate on line 41. It’s buried among a lot of verbiage about “Enter the smaller of line X or line Y” and “Subtract the larger of line Y or line Z,” but it’s there.

All Retirees Should Have It So Good

Q: I pay more in taxes now than when my now-deceased husband and I were both working. We invested in various funds, believing Social Security would probably not be there for us. Now my entire yearly income is taken for taxes! This includes my state retirement pension and my husband’s Social Security. The law forces me to withdraw from our retirement account and pay taxes on the withdrawals, even though our money had already been taxed when our portfolio was set up! How do we stop the over-bloated and overstuffed insatiable pork-belly appetites of our bureaucrats in Washington?

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A: Madam, get a grip.

Your whole income is not being taken for taxes. The maximum marginal tax rate you could pay is 39.6% federal and 9.3% state, and that’s only if your income is north of $278,450. You may pay higher effective rates if your income is in that stratosphere, since some deductions start to phase out, but it’s nowhere near 100%.

Your taxes on your total income, including your retirement account withdrawals, also might be equal to your pension and Social Security payments, but you can’t exactly cry poverty. If your taxes are that high, then you’re pulling in a heck of a lot more than the average single retired woman (who, by the way, is frighteningly likely to spend her final years below the poverty line).

You’re also not being required to pay taxes twice. You might have paid taxes on the money that went into your retirement account, but you haven’t paid taxes on the earnings. That’s what’s happening now as you withdraw from your retirement funds.

If you want to look for ways to reduce your taxes legally, you can consult the many fine tax books in your local library or bookstore, or engage the services of an enrolled agent, certified public accountant or other tax preparer. If you want to rail against the injustices of a system that requires people to actually pay for the services they enjoy--public education, police protection, national defense, highways and roads, ad infinitum--you’ll have to take it somewhere else.

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Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.