I have talked before about the kind of sites to link with. Also I have given some pretty good detailed advice about how to build up your in bound links, (IBL) but I got asked the question today that I feel will make a good read.
Can linking with a bad site effect my standing with Google, and if it does how can I make sure the sites I am currently linking to are not banned?
Yes, linking with a banned site on Google can effect the way that Google looks at you. You never want to be guilty by association. Every time you give a link to someone, if its an anchor text or even just a website address that carry's a link with it, you are voting for that site. You are telling the search engines, "here I recommend this site" and that can be a bad thing for you if you are recommending a site that has been banned by Google.
There are many tools out there that will help you check if you are linking to banned sites, but its actually pretty simple and you don't even need to download program to do it. Just go to Google and type in (in the Google search bar-without the quotes) "site:www.whateverdomainname.com
Once you do this if the site does not bring back any results, but you know its' a site that has been around for a while they may have been banned. Also, if you have the Google toolbar installed on your computer if you do not see a page rank and the bar is a "grey" color this is also a pretty good indication that they have been banned. Another toolbar that can help find useful information like this out can be found at SEOINC.
Play a good clean game and you will eventually win. I know there is a lot of black hat techniques and people not playing by the rules that seem to always be beating you, but it will eventually catch up with them. Google will reward the site that is playing by ALL the rules.