Authorized user can't be legally responsible for tax payment
Dear Credit Score Report,
I
am the authorized user of an American Express credit card. I am going through
debt settlement with the primary cardholder's permission. I've already messed
up her credit and am trying to avoid messing up her taxes due to the canceled
debt. Is there any way I can be responsible for the 1099-C? -- Jake Morgan
Hey Jake,
As the authorized cardholder, even if you're responsible for
the unpaid debt, you can't take on the primary cardholder's liability for the
resulting taxes.
It's certainly admirable that you're trying to save your
friend from a higher tax payment, but unfortunately it's too late for that.
Under your debt settlement plan (which can lower a FICO credit score by 45 to 125 points), the lender has agreed to accept a
partial repayment of the money you borrowed and canceled the remaining
debt. But since you're not the primary account holder, your friend will have to pay. That's because at tax time, the "primary
cardholder will be responsible for any income tax consequences of the canceled debt," says Alison Flores, an analyst
with The Tax Institute at H&R Block.
A 1099-C form, as you likely know, is basically "a tax form documenting any
amount of debt not paid under the settlement as income on which federal income
tax must be paid," says Rod Griffin, director of public education for
credit bureau Experian. When a debt of
$600 or more gets canceled, the lender sends a 1099-C form to both the Internal
Revenue Service and the borrower. There isn't much flexibility for any of the
parties involved: American Express, the lender in this instance, says it is
obligated by law to issue a 1099-C for canceled debt. AmEx says that form is sent
to the primary cardholder listed in its records. According to Flores, that's
who's liable for repayment. She explains that the 1099-C form includes the
debtor's name, address and tax identification number, as well as the date the
debt was canceled, the amount of the canceled debt and a description of the
debt. "An authorized user is not responsible for any of the debts on the
account," Griffin says.
While you aren't legally responsible, that doesn't mean you
can't step up and help out the primary cardholder. Consider the following
suggestions:
-
Give her
money. Although it's her responsibility to pay, you can give her money to
cover the cost of her increased taxes. This is probably the best way to
help. After all, if she could have afforded to repay the debt on your shared
account, her credit wouldn't have been ruined.
-
Find a
professional. You may need outside help. If neither of you already have
one, seek out a tax preparer who can guide her through the challenges following the cancellation of debt.
You may also want to protect yourself from credit score
damage resulting from that debt settlement.
Because the settlement notation will appear on both credit reports , "they
are both going to take a significant hit," says Gail Cunningham, vice
president of public relations for the National Foundation for Credit
Counseling. In order to avoid credit score damage, you should remove yourself as an authorized user from that account by contacting American
Express. Once you are removed from the account, that item will eventually come
off your credit report.
Removing yourself from the account, of course,
won't do anything for the primary cardholder. It's a lousy way for her to learn
a lesson, but when an authorized borrower messes up, the primary cardholder is left
to deal with the resulting debt, credit score damage and any potential tax
increase. That's why cardholders always need to think carefully before giving
others access to their accounts.
Good luck!
-- Jeremy
See related: Beware of IRS tax bite that may follow canceled debt, FICO reveals how common credit mistakes affect scores, Cardholders' mistakes can bring down authorized users' credit score
Jeremy M. Simon is a former CreditCards.com reporter who wrote about credit scoring, economic data, credit card crime and other issues. He is based in Austin, Texas. He is a graduate of Vassar College and has previously worked for Thomson Financial in New York City, where he wrote about the stock markets, and Texas Monthly, as well as several publications in Austin.
Send your question to The Credit Score Report.
Published: July 20, 2010
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