Ask Liz Weston

Q: I recently received compensation for serving as executor for a deceased neighbor’s estate. The amount was just under $10,000. I am 72, single, with few assets. What is the best way to invest this money so I don’t wind up paying a chunk in taxes?

In the retirement community where I live, this is a common question, because many residents serve as executors for their neighbors, and all have very modest income.

A: The income you receive as an executor or personal representative is taxable as income in the year you receive it, and there’s not much you can do about that. What you’re probably asking is how to minimize future taxes on any gains this money might generate.

One of the easiest choices, if you really don’t want to pay any taxes, is to simply invest in a tax-free money market account. These accounts typically invest in insured municipal bonds with little risk of loss, and your money is accessible whenever you need it.

What you probably don’t want to do is invest in an annuity. These are often pushed on seniors who want tax deferral, but annuities usually come with relatively high expenses and surrender charges that could seriously eat into your stash if you needed to withdraw money.

Before you do anything, though, you might want to have a chat with a tax professional about the implications of your investment. You may be overestimating how much this money will cost you. If you’re in the 15% tax bracket, for example, you may be better off in a taxable money market account that earns a higher return. Currently, taxable money market accounts are averaging better than 2%, while tax-free money markets average less than 1%.

Many seniors get in trouble with inappropriate investments in trying to avoid a tax bite that’s really little more than a nibble.

Question: My mother pays for most large purchases with cash. She wrote checks to buy three cars in the last year — two luxury cars and a sport utility vehicle — yet according to lenders, she has bad credit.

Why do people like her, who use credit cards only for emergencies and then pay them off at the end of the month, get penalized when they want to buy something big like a house?

Answer: Your mother may not have bad credit. What she may have is a credit history that’s too thin to generate the three-digit credit score that most lenders use to judge a person’s creditworthiness.

The FICO scoring formula requires a consumer to have at least one account on her credit report that’s been open a minimum of six months and at least one account to be updated in the previous six months.

This requirement can make it tough for young people and immigrants to establish credit, because many lenders won’t open an account if the applicant’s credit history is too thin to generate a credit score.

But, as you’ve seen, the requirement also can hamper the well-off who choose not to use credit regularly. Paying for everything with cash might be smart for them financially, but they may find themselves unable to get loans at decent rates when they need to borrow.

The fix for this problem is fairly simple: Your mom would just need to use her credit cards more regularly. She doesn’t have to carry a balance; the FICO credit scoring formula doesn’t distinguish between balances that are paid off and those that are carried month to month.

All she would have to do is make a few small charges each month and pay them off promptly. She should avoid “maxing out” her cards or even using more than about 30% of her credit limit, and she should pay the bill on time. She could even put this on automatic, by having some regular expense such as a newspaper subscription charged to her card and then authorizing the payment directly from her checking account.

Q: One of my credit card companies charged me a late fee that put my balance over the card’s limit, and then it added an over-limit fee. When I refused to pay, it kept adding late and over-limit fees, then called repeatedly to harass me about payment.

Q: A good friend of mine is quickly approaching retirement age but has always worked “under the table” as a housekeeper or nanny. She hasn’t been able to save much over the years and she’s getting a little too old to scrub floors or chase after toddlers. Is there any way she could qualify for Social Security benefits?

A: If she’s married and her spouse has paid into Social Security for at least 10 years, she could claim a benefit based on his work record. If she’s not married now but was married for at least 10 years to someone who paid into the system, she could also qualify.

Otherwise, she’s pretty much out of luck.

This is why workers–and household employers–should avoid under-the-table arrangements like the plague. The short-term savings on taxes have real and long-term implications for people’s lives.