Authorized user can't be legally responsible for tax payment

Question for the expert

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

Answer for the expert

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.        

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 debtFICO reveals how common credit mistakes affect scoresCardholders' mistakes can bring down authorized users' credit score

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Updated: 03-21-2019