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-- Posted: Oct. 11, 1999

Dorothy Rosen -- The Dollar Diva Ask the Dollar Diva

Editor's note: In April 2006, FDIC deposit insurance coverage on retirement accounts held at banking institutions was raised from $100,000 to $250,000. Non-retirement account FDIC deposit insurance coverage remains at $100,000.

Big Brother tracks large transactions

Dear Dollar Diva,
I have a two-part question:

  • When you place a large sum of money in a joint bank account, do you have to pay a gift tax or other tax?

  • Can you remove the money in large sums to make cash purchases, such as a house, or is there a limit?

Thank you.

Part 1: To answer this question, the Diva needs to know where the stash of cash came from:

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  • For services provided (even if it's called a gift): The Internal Revenue Service would consider an amount equal to the value of the services provided to be compensation, so you would have to pay income and Social Security taxes on that.

  • A gift to you -- no services provided: Any amount you received in excess of the value of any services provided would be a gift. If the gift is taxable, the person who gave the gift, not the recipient, is responsible for paying the gift tax.

  • A person can give $10,000, tax free, each year to as many individual recipients as he wants. His spouse can do the same.

  • Proceeds from sale of investments: If you sold some investments and deposited the proceeds in your bank account, you would not have to pay any tax just for depositing the cash in the account. If the investments were sold at a gain, you would report the capital gain on your income tax return and pay income tax on it, regardless of what you did with the proceeds.

Keep the following in mind when you deposit large amounts of cash in your bank account:

  • In the event of an IRS audit, you could be asked to produce bank statements for whatever year is under audit. If the amount you've reported as income on your tax return is different from the deposits made to your bank account, the burden of proving that the deposits are not income falls on you.

  • If your account is insured by the Federal Deposit Insurance Corporation, it is only insured for up to $100,000. If you have more cash than that, limit your deposits to no more than $100,000 per bank.

Part 2: There is no limit to the amount you can take out of your bank account. If you have a million dollars in your account, you can withdraw it and use it to buy a house.

Be aware that the IRS requires the filing of a Form 8300, "Report of Cash Payments Over $10,000 Received in a Trade or Business," by anyone engaged in a trade or business who receives more than $10,000 in cash in one transaction. The business transaction can be anything or anywhere -- from a deposit in a savings or checking account to a cash payment to the guy who installed your new entertainment room. If more than $10,000 in cash changes hands, it has to be reported. Reportable transactions include the following:

  • Cash, money orders, traveler's checks received or exchanged
  • Purchase of real estate or personal property
  • Business services provided
  • Bail bond
  • Paying debts

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