I recently had a really long conversation with a reader who asked me for advice on what to do about his ailing father who is in debt. I have some opinions here and really want to help, but I’m no lawyer or tax accountant. So perhaps the Financial Samurai community can come together and provide the best course of action.
If you are to read this post, please leave the judging to a minimum and open your hearts and intellectual minds instead. I’ve written the post in a way that best reflects our conversation and the dilemma at hand.
My father is 61 years and has been out of work for the past year and a half. He hurt his back, and is currently on disability leave from his job as a construction worker. He lives in rural Pennsylvania, where the cost of living is low, but so are the wages. The most he’s ever made was $35,000, and that’s if he was fully employed all year, which often times, he was not.
My grandmother passed away three years ago, and as the good son, my father paid for the $6,000 funeral himself, even though he has an older sister who could have helped pitch in. My grandma left my father her house, even though he has a small house of his own. With the little remaining money he had post the funeral, he’s been fixing up the house to sell. It’s been a rough road thanks to the economy, and his funds have run out. That was last year.
We had a heart-to-heart last Thanksgiving, and I discovered that not only did my father have no savings, he was $13,000 in credit card debt. His disability insurance of $1,200 provides him enough to scrape by every month, but without a healthy back, he can’t get back to work. He wants to pay off his credit card debt, finish up everything in the house, and just lead a simple life. I sent him some money then, and one more time again this year, but something just feels a little off.
He is eligible for Social Security next year, which I think will provide a boost to his income, but I’m not sure. Are you allowed to receive disability insurance and social security at the same time? I’ve also read that it’s better to wait a little longer to collect social security so that his monthly checks will be higher. But, I’m stressed too, because he has other serious health issues which I’d prefer not to get into.
My father has a lot of pride and he doesn’t want to ask me for money. I know it embarrasses him to ask, even though I am happy to help. I’m not that wealthy myself, but I could afford giving him an extra $500 a month if I had to. I’ll just save less for my own retirement. He feels bad taking my money, but after helping raise me and pay for my tuition, I want to help. I need to help!
When I talked to him last week, he came up with an idea that surprised me. His little house in Pennsylvania actually sits on about 50 acres of land with lots of huge trees. He told me that he spoke to an “timber agent”, who has secured a contract to have loggers cut down an untold number of his trees and pay him a handsome sum of roughly ~$20,000. He said he’d still have many trees left, and a lot of the big ones were rotting away anyway, and would eventually fall down.
The only issue is that if he receives $20,000, he will lose his disability benefits because there is a low income ceiling to qualify (even though he’s not cutting down the trees himself, he would still have to claim all the income. The government won’t give out disability benefits to people making income over ~12,000/year because they assume you can’t work if you’re disabled). He could apply for social security next year, but he would get about $400 less a month. That’s a full $4,800 a year lost for a man who doesn’t know when he’ll be able to work again. He’s stuck between a rock and a hard place because he needs more money to survive and pay off his credit card debt. Yet if he proceeds with the monetization of his land, he’ll get penalized from the government. Oh, how I despise the government with all its rules. He’s a military veteran too. Why can’t the government just take care of our troops when they are in need?
He said he’d like to have the logging company send me the $20,000 in proceeds so that he can still receive his much needed disability benefits, and pay me back for all the times I’ve helped him. And, when the time comes where he could use some money, and if Social Security isn’t enough, he’d kindly ask me to help him out. I could hear his pride talking. He felt so proud that he finally thought of a way to make a decent income during a terrible property market. Of course I would help him out, even without the $20,000. I just don’t know what the implications are.
My main question is whether I am allowed to receive $20,000 from a company for trees I do not own? I’m assuming that anybody can receive any legitimate money from anybody or corporation so long as the person receiving the money files a specific tax form and pays the appropriate level of taxes. All our government cares about is making more money off of us, right?
I’m also curious to know what other ramifications there are for accepting this money. Will filing a Schedule C raise red flags? Will I get audited? Are only those who file Schedule Cs and load them up with expenses to make it loss making so they can pay less taxes at risk? If I pay taxes on the funds, am I allowed to then send him a check for $500 here and there tax free to help him out? So many questions and unknowns!
Our tax code is so complicated, I’m not sure about anything. All I want to do is empower my father to help himself. He doesn’t want my money and by accepting this money, it’ll allow him to keep his disability benefits, show that he can help out his son, and demonstrate that not all is lost, and that even with a bad back at 61, he’s able to produce some income.
I’ve come up with three solutions to this scenario:
1) The first scenarios is to actually not accept the money, but to ask the logging company to pay the $20,000 in installments over several years so that the father can keep receiving disability insurance. The father needs to figure out what the maximum income he is allowed to earn in order to keep receiving disability and calculate some math. Figure out how much the father has earned in 2011 already and subtract that level by the maximum income allowed to earn. If he’s earned $6,000 and the maximum allowable is $12,000, then the father cannot accept more than $5,999 (to be safe) this year. Ask the logging company to pay $5,999 in year one, $7,001 in year two, and $7,000 in year three so that there’s a buffer in year 2 and 3 if he wants to make $5,000 doing something else, and he still needs disability. The money should be put in an independent escrow company so that just in case the logging company goes bankrupt, the father will still get paid.
2) Accept the money and file a 1099 MISC/Schedule C highlighting the $20,000 in other income as a contractor/sole proprietor. At the same time, ask the father to write a letter consenting to the payment of the $20,000 by the logging company to the son, and have the logging company and father both sign the document, and send a copy to the son. Again, I am assuming that so long as the son pays taxes on the $20,000, and doesn’t load the Schedule C with all these random types of expenses then the government should find this acceptable, especially since the son is in a higher tax bracket. However, as I said in the beginning, I am not a tax attorney/accountant, so I am not exactly sure what the implications are and I’m hoping some of you can share your thoughts.
3) Similar to option 2, accept the money but file a Schedule D as an individual instead reporting the income as capital gains (if the company agrees not to issue a 1099 MISC), treating the sale as an investment. The cost basis needed to calculate the net income could be the price the father paid when he acquired the land (only ~$9,000 bought many years ago) or avoid all of that and claim the entire $20,000 without reducing it by a cost basis. I’m certainly not an expert on timber sales, but I’d think it could be treated this way as a gift. Need some help here from you guys as I’m not sure this will fly.
The worst case scenario is that the son gets audited, the IRS says this is not allowed even though the son has payed the taxes, and has to pay some penalty for receiving payment from the logging company. Furthermore, the father loses his disability or social security for trying to double dip. But, I can’t see the father losing social security benefits that he’s paid into over the past 35+ years. What if the father didn’t have this disability insurance dilemma, and was just poor and wanted to help his son, who was also going through financial hardship? I don’t see why his father can just have the logging company pay his son, who will pay the taxes instead.
The main goal is to help out a father in need, and protect him from losing his insurance given that he already has a life threatening ailment. No insurance company will insure a man with a history of life threatening illnesses. That’s just a fact, and don’t get me started about the countless cases of insurance companies screwing their clients out of claims. It’s just sick and unfathomable that business has to get in the way of doing the right thing.
Readers, please share your advice and solutions to this dilemma. Can you get social security and disability insurance at the same time? Hopefully they are not mutually exclusive. Anybody with tax or legal insights is much appreciated!