I inherited a $300,000 checking account. When I pay taxes on the curiosity, would my partner be entitled to a share of the account if we cut up?

How does the curiosity earned have an effect on the “separateness” of that inherited account?

Commingling Conundrum

Dear Commingling,

Your letter by no means mentions the phrases “divorce,” “split” or provides any whiff of relationship strife. I don’t want that on you, and I’m sorry to even elevate the specter.

But the letter is concerning the property that spouses do and don’t share — and when the traces blur.

So I checked with a matrimonial lawyer. “The easy fix would be for the spouse to have a [certified public accountant] figure out tax consequences and write a check,” mentioned Ben Stevens, senior accomplice at The Stevens Law Group in Spartanburg, S.C.

In different phrases, decide the tax legal responsibility from the curiosity earnings after which pay it with cash that’s yours and yours alone, he defined.

“That would remove any concern,” mentioned Stevens, who can be the present president of the American Academy of Matrimonial Lawyers. It would even be a powerful counter to the arguments of hiring what some individuals may seek advice from as “a very creative lawyer,” he added.

To be protected, it might be clever to drag the cash for any taxes on the curiosity instantly from the inherited account, mentioned Paula McMillan, wealth administration advisor with Stearns Financial Group in Greensboro, N.C.

Just earlier than tapping the inherited account, write the verify’s quantity in a ledger and its function. “Create a paper trail,” McMillan mentioned. In this specific withdrawal, take solely what’s wanted for taxes, she added.

McMillan advises depositing the verify from the inherited account into the checking account that pays any tax payments, even when that’s a joint account. A separate verify only for one little bit of a tax invoice may confuse the IRS or state tax businesses, McMillan famous.

But the ledger traces the cash again to the inherited account should you, your partner or anybody else wants to find out the supply of tax funds associated to this account.

Stevens offers with the division of marital belongings and non-marital belongings on a regular basis. Gifts and inheritances meant for one specific particular person in a pair are “the classic example of non-marital assets,” he mentioned.

Transmutation of separate belongings

Of course, non-marital belongings can flip into marital belongings. That’s the divorce legislation idea of “transmutation,” Stevens added.

If, for instance, you deposited the $300,000 right into a joint account, that will flip the cash from a separate asset to a marital asset. If you used part of that cash for a renovation in your jointly-held dwelling, as soon as once more transmutation would happen.

But even with out the separate fee tactic, may tax funds from a commingled account convert the inherited account into shared property?

“In South Carolina, I think the answer would be no,” mentioned Stevens. That pondering may typically apply elsewhere, however he mentioned it’s finest to verify with an professional in your state-specific guidelines.

Cash investments and financial savings accounts turned extra alluring as rates of interest climbed in 2022 and 2023, however they’re taxed as peculiar earnings and never as a capital acquire with a preferential tax price.

Married {couples} submitting separate income-tax returns usually sacrifice the tax breaks and cash benefits of a joint return, McMillan mentioned. “Unless it’s contentious or some other reason, you don’t come out ahead,” she mentioned.

Maybe the twists of tax and matrimonial legislation sound concerned. But that’s the simple half. Proceed with warning on the way you focus on this and deal with it along with your partner.

Claims on cash and household dynamics are a strong concoction that may bitter simply.

“There’s money and all of the sudden, it’s a bloodbath. It’s just awful to watch,” Stevens mentioned. So proceed with care.

Stevens usually meets with individuals who aren’t readying a cut up however simply need to know the ‘what if’s. “It’s never too early to ask those questions, because they can save heartache, headache and money down the road,” he mentioned.

Got a tax query? Write me at akeshner@marketwatch.com.

Thanks for studying. I need to aid you assume extra broadly concerning the points that have an effect on your taxes. I’m not providing tax recommendation, simply an try to take a look at what the swirl of tax guidelines and financial situations may imply to your pockets.