Tax on joint accounts for online investing

[tokyoal]

Hello,

I'm new to investing, so would appreciate your patience if I say anything boneheaded here, thanks.

I'm considering opening an online account with either Interactive Brokers or Fidelity for buying stocks and ETFs and was wondering if anyone knows the pros and cons of opening a joint account (JTWRS) with my wife.
I'd be the active trader, but in the event of my death (not for a long time I hope, although my kids seem to trying to speed it along), a JTWRS would allow probate to be skipped and she could just take over the account and any funds in there.

However, I'm not sure who would pay the tax on any potential gains made while using the account (capital gains, dividends, interest) if the account is in both of our names.
I'm guessing as I would be the primary name on the account, then it would be my job to do it on my tax returns, but as a permanent resident wouldn't that open me up to double taxation?

Has anyone done this or have any advice how this tax would work?

Thanks.

[captainspoke]

I'm not an expert, but I think this will be a can of worms... (this is all speculative)

Is it correct to assume that you are US, and that your wife is Japanese (and does not have a green card)?

For a US account, you will have the FEIE (and assuming that you don't earn over that). If it is your account, that means your income will effectively be zero, so a certain amount of interest, dividends, and even gains will be tax free (up to the amount of deductions you can claim). OTOH, if it is your wife's account, I think there is an automatic US withholding tax for all non-US persons. I'm not sure how you could straddle two nationalities there.

Second, inheritance is quite different for US/Japan, especially if your wife is a j-national with no green card. The US/IRS comes down hard on foreign nationals inheriting US assets. I think taxes start after $50k and increase fairly quickly--nothing like the large tax free amount that would be allowed a US spouse. And Japan will somehow want their share, too.

So how would tax authorities decide who really owned the account and its funds? Likely it will be 'owned' by whoever is (has been) filing its gains/payouts on their taxes (both here and in the US).

At least for domestic bank accounts (and likely brokerage accounts), Japan doesn't have (recognize) joint ownership. I'm not sure how they'd view a foreign account that was shared/joint. Maybe they would, since it is outside of Japan. Or maybe not?

**

Since my wife has always worked and made good money, our financial lives have necessarily been separate--our own jobs, incomes, bank accounts, taxes, health premiums, pensions, and so on. She certainly makes enough so that I cannot claim her as a dependent on my tax returns here (and even now as a retiree I still make enough that she cannot claim me as a dependent).

**

Most banks/brokers in the US have something called "transfer on death", by which you can nominate inheritor(s) so as to at least bypass probate. Maybe the closest thing to a joint holding? But you'd still have to wrestle with different inheritance rules/taxes, there and here.

I'm not sure it's much of a solution, but on my death most of my US assets go to our grown kids--who are US passport holders. I think this will simplify inheritance on the US side of things, and may also be the way to go for the least taxation (US citizens as inheritors being taxed less on those US assets than an inheriting foreign national). But actually, when Japan gets added to the mix--as I'm sure it will be--that may not be the case.

**

So there you have some of my rambling. I hope someone posts some other ideas/alternatives to explore.

[eyeswideshut]

This is a super interesting question as I have thought about converting my overseas trading account (Singapore) to a joint account for the very same reasons. Really curious if anyone has had advice on how the JTO treats joint overseas accounts. It seems unlikely they will interpret this in any way that permits you (and your wife) to avoid inheritance tax or gift tax. In my years here one thing I have learned is that if there is a way to interpret a transaction as a taxable event, the tax authorities will do so.

One thought is that, if your primary concern is the practical ramifications of your wife not having access to those assets in the event of your death, then the simple solution is to just give her access to the account but not declare her as a joint owner.

[tokyoal]

Thanks for your replies, they are much appreciated.

I ought to have mentioned that I'm British, although I don't think that should complicate matters too much.

After digging around a bit I read (on investopedia) that there is no tax in the US on non-alien residents for capital gains, but a withholding tax on dividends (it's usually 30%, but may be different with Japan, depending on the US-Japan tax treaty). Capital gains would be paid in Japan only.
It would seem that it is up to the couple (if they open a JTWRS) on how they decide to declare it on their tax returns, just as long as everything is included.
It could be a 50/50 split or 100/0, depending on them. That's the conclusion I've drawn from all the info out there. If I'm wrong, then apologies and I'm happy to be corrected.

I looked at 'transfer on death' and that would close the account out with assets being transferred to the beneficiary. Seems pretty straightforward, it just means that the account is gone, so no further opportunity for trading/growth. The beneficiary would have to open a new account and buy everything again if they wanted to continue trading.
This seems the easiest if she just wants the money (probably most realistic), but if I gave her access to the account then kicked the bucket, and she continued trading under my name, wouldn't that be fraud?

The JTWRS looks most complicated, but if anyone has managed to do it it'd be a massive help to hear about it.

Thanks again for taking the time.

[StockBeard]

withholding tax on dividends (it's usually 30%, but may be different with Japan, depending on the US-Japan tax treaty).

It is indeed different for Japan. Dividends Withholding is 10% due to the US-Japan tax treaty.

[10-7]

I realize this is an old post, but thought I could offer my opinion for future reference.
And if you notice this post, tokyoal, maybe let us know what you decided to do?
As you probably already found out, Fidelity isn't an option because they will not open a new account for anyone outside the US...even a US citizen/person.
Regarding JTWRS/JTWROS...it is not at all a can of worms.
I don't know of a simpler way for couples to ensure uninterrupted and untaxed joint marital assets under US law.
The account is owned jointly by yourself and your wife (with one person being primary on the account) and when one of you passes the account becomes the sole property of the surviving spouse.
There is NO inheritance when an owner passes, under US law, because the surviving spouse is already an owner. There is no probate and no forced liquidation with a huge capital gains tax bill (as with TOD).
Japan will see it differently, but that is a separate matter.
If the funds contributed to the account were from your income alone, likely all of it will be deemed an inheritance for your wife.
If your wife also has funds to invest, it would be best for her to have her own account with you named as a joint owner.
If you're the sole breadwinner, consider gifting funds (up to the tax-free allowance) to your wife's account annually.
And for taxes...again simple...as non-US persons, witholding will be at the treaty rate as previously mentioned...which you will claim a credit for when filing your Japanese return. Report your account activity on your return...and your wife's account activity on her own return.
Where there is some complexity...not caused by JTWROS...is cost basis tracking for Japanese tax purposes. A US brokerage likely will not track/provide average cost method for stocks. The IRS doesn't allow this method for stocks. Unfortunately, that is the method required by Japanese tax authorities, so you'll have to maintain your own records in that regard. Not so much complex as it is tedious I guess...
In my experience, JTWROS is seamless with US banking/brokerage institutions and I am grateful for the US view on marital assets.
Of course there is a caveat...if things aren't working out with your forever love...they have full access and equal rights to these assets and can't be removed without their consent.
Sorry to end on that down note...endless love for everyone