Warning to Co-signers

Today TaxMama® hears from Toni in the TaxQuips Forum with this sad problem. “I volunteer with AARP Tax-Aide. Last week a taxpayer brought in a 1099-C with his other papers. It turns out he had co-signed for a vehicle. When the vehicle ‘owner’ disappeared, the lienholder collected a reduced amount from the co-signer. It was so sad to see that in addition to (partially) paying the other person’s debt, the taxpayer had a significant impact to his Federal and State taxes when adding the cancelled debt to his income. I’m wondering if there is a way to “assign” this income to the person who ‘owns’ the vehicle. Or if the lienholder should have issued the 1099-C to the other person – certainly they have his Tax ID#.”  

Ask TaxMama

Hi Toni,

It’s a HORRIBLE thing!

And people can be so wonderful, helping out others who can’t get loans. They don’t understand how this will affect THEIR credit when the flake flakes out. I am turning this into a TaxQuip for today to alert people to the realistic potential outcome when they co-sign on a loan. You see, the consequences can be even worse than additional taxes.

My friend is going this same problem with a car. It is seriously messing up her credit. In fact, THIS is what has prevented her from getting a loan modification over a year ago. This silly little favor, co-signing on a flaky friend’s car, is costing her a fortune. While she is sorting out this problem, her mortgage interest rate is at least 4% too high, costing about $12,000 extra for the year – which, with her reduced income, she cannot afford. In fact, she might even lose the home.

Alas, this cancelled debt IS your client’s responsibility. It is also the other person’s. Perhaps you can help your client issue a 1099-C for half the amount to the other person? Or even try issuing the 1099-C in full to the other person.

I don’t know how IRS will regard that – since he did co-sign the loan, so he is 100% responsible. So, I doubt that issuing the 1099-C for the full amount is kosher. And no doubt, your client is not insolvent. So he can’t use that way to reduce the impact of the cancelled debt. He sounds like a solid person. So…this really does impact his tax return, and probably makes his SS income taxable, too.

Perhaps there’s some karmic retribution for the jerk. Or not.

Or maybe someone here can come up with a better suggestion?

And remember, you can find answers to all kinds of questions about cancellation of debt and other tax issues, free. Where? Where else? At www.TaxMama.com.

One thought on “Warning to Co-signers

  1. Mona Yassine says:

    I have a question, can we consider the cancellation of indebtedness as excludable gift under 102(a) if the owner of the vehicle forgives the co signer, because the money is considered as income to the owner of the vehicle

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