Category: Financial Concepts

Collateral: Alternatives to Borrowing from the Life Insurance Company

Those advisors that are “whole-life friendly” know the many advantages of a whole life insurance policy to its policyholders, and the options that are available with a little creativity and a prosperity mindset. One of the primary advantages of a policy is the ability to borrow against the policy’s cash value and secure a loan straight from the insurance company—without the long approval process of a bank loan.

While beneficial for a number of reasons, borrowing against the policy is not always the best strategy depending on your client’s desires. Using a policy as collateral, however, can be a great strategy for acquiring a bank loan.

For example, clients who are beginning a business might find it wiser to secure a loan from the bank while their credit is good. If the cash flow is less than expected in the first year, the client can utilize the savings of their cash value to assist in loan repayment. If the client approached the loan the other way around, they might be unable to acquire help from the bank if their business does not perform as expected. This strategy could end up consuming the cash value in repayment to the insurance company and put the business in hot water.

In this case, the client could use the cash value of their policy as collateral to secure a bank loan. And with whole life insurance, the policyholder can often use the policy as collateral from local banks and credit unions.

When using the cash value as collateral, banks loans often have high loan-to-value limits, usually at 80 or 90%. This means a client could borrow up to $80k or $90k with $100k of cash value as collateral. In addition, bank rates are often lower than the interest rates at the insurance company for policy loans, with current rates as low as prime.

While using the policy as collateral, the client can actually have more freedom in a new or uncertain business venture because of the opportunity fund of their cash value. In turn, the client has the opportunity for plenty of future business ventures. See our previous article for other underutilized ways to use a whole life insurance policy.

It’s important to note that for clients with a term insurance policy, there is no cash value at all, and therefore no ability borrow against the policy or use it as collateral.

While this option is most common with local institutions, the banks listed below have been referred to us as providing this service nationally. Please contact them directly for more information.

Jeanne Leconte
Kensington Financial Associates
18851 NE 29th Avenue, Suite 413
Personal AND “Direct to Business” loans
OK to use multiple policies for collateral
Aventura, FL 33180
(786) 574-4132
Kensington Informational Flyer

Matthew Hale
Heritage Bank

Greater Atlanta Area
404.933.5144 (cell)

Patricia Davino
Valley National Bank

1455 Valley Road
Wayne, NJ 07470
(862) 261-3065 (direct)
(973) 934-5886 (cell)

Kathy Smith
AVP, Portfolio Manager
3490 Piedmont Road NE, Suite 700
Atlanta, GA 30305
404.814.8006 | f: 404.393.9925

For more information on the living benefits of life insurance, see Kim D. H. Butler’s book, Live Your Life Insurance, and Kim and Jack Burns’ new book, Busting the Life Insurance Lies.


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7 Blind Spots of Financial Advisors

Even a seasoned financial advisor can be vulnerable to certain blind spots within the field, what matters is recognizing and learning from these blind spots. Here we have gathered a list of the seven major areas in which advisors can falter, to save you from the same oversights.

1. Forgetting Time Value of Money

As an advisor, the time value of money must be applied to every calculation, and any calculation that does not take this into account is not accurate. Every dollar has a value that increases over time, or in other words, accrues interest. A common blind spot for financial advisors and clients is forgetting to account for this interest. Time value might seem minor with interest rates as low as they are, but when a cumulative sum is plugged into a calculation it loses all accuracy because the interest value is lost.

Interest rates vary depending on the scenario—whether money is being socked away into savings, paid in premiums to an insurance policy, or otherwise—but they are always necessary to include. Regular calculators don’t do a good job of applying the time value of money, which is why interest rates are often overlooked by advisors but Truth Concepts software makes the calculations of interest rates simple and makes the projections you show your client accurate.

2. Having Unequal Time Frames

It is all too easy to fall into the trap of comparing mortgage rates with unequal time frames. As with any scientific experiment, when comparing two things you must have only one variable. Often advisors make the mistake of comparing 15 and 30-year mortgages without adjusting the time frames to equal each other—a common mistake to make.

When comparing mortgages, you already have a variable, so all other components must be the same to get an accurate comparison. In simple terms, that means these mortgages must be compared at the same rates—the simplest being a 15-year mortgage over 30 years compared to a 30-year mortgage over 30 years. When advisors compare rates at unequal time frames, the data will be skewed.

3. Ignoring Opportunity Cost

Opportunity cost is closely linked to the time value of money, which can be boiled down to this: opportunity cost is the loss of a potential opportunity by taking another one. In typical financial planning, the opportunity cost is not often factored into discussions, or at least not in a way that reveals the whole truth. As with every choice, the possibility of another choice is ruled out.

When it comes to investing your money, opportunity cost can be everything—what is the opportunity cost of fees and taxes on the growth of many stock market oriented investments? What is the cost of taking out a loan with the bank rather than borrowing against your whole life’s cash value at the insurance company (or vice versa)? TC software makes it simple to map out multiple options for your client, and Truth Training shows you how through a three-day intensive course.

4. Not Understanding How Interest Rates Work

Interest rates are one of the most commonly misunderstood financial concepts, which is how banks are able to make large profits off of seemingly low rates. As a financial advisor it is crucial to understand the true nature of interest rates, so you can best demonstrate the principals to your clients. When assessing the difference between two rates, borrowing at 3% and investing at 9% may not seem too different—only a difference of 6%, right? Unfortunately, that’s the catch; banks and other companies depend on this misconception when the margin of increase is truly a 200% markup.

When working with interest rates, converting the rates to dollars can help in understanding their true nature. For example, if your client were to take out a loan of $100,000 at a 4% interest rate and invest that same amount at 5%, you can quickly see that the difference is not 1% but 25%. Learning to understand the truth behind interest rates can keep more money in your client’s pocket instead of the bank’s. Using the TC calculators make it simple to calculate these differences without needing a specific formula.

Figure 1 In this example we have shown 4%, the amount borrowed, as the present value. The future value of 5% is the amount invested. One year is the control. The difference is 25%, or a quarter increase from 4%.

Figure 2 This example serves to show the difference between a 4% rate and a 5% rate on the same amount of money over time. One percent makes quite the difference in this scenario–doesn’t look like 1% now, does it?


5. Thinking Life Insurance Only Works If It Has PUA’s

PUA’s can certainly benefit a whole life policy, but they do not make or break one. Whole life does not offer large immediate returns but requires patience to build up cash value. After 5 years a policy truly begins to pick up, which is why it’s important to encourage clients to start early to reap the most benefit from their policy. Even a minimum payment of $100/month for a young person can offer great returns only a few years down the road—and when things are looking up, it doesn’t hurt to add a PUA or increase the premium.

The best way to guarantee the failure of a policy is not to have one at all. Savings are a crucial foundation of prosperity, and a whole life insurance policy is an invaluable savings tool.

6. Believing Life Insurance Only Works If You Borrow Against It

The prospect of borrowing against the CV of a life insurance policy seems to be the biggest benefit, but it is not the only way to make a policy “work.” Life is unpredictable, and having a whole life policy in place can benefit your client in case of an emergency.

In fact, the first job of the cash value of the whole life policy should be an emergency fund, left there at the insurance company. This money creates peace of mind and financial confidence for the family so they can pursue the next phase of the policy: their opportunity fund.  Many advisors know that families benefit from having large amounts of available cash value, even though they may never use it, just for the potential of being able to take advantage of an opportunity when it comes along.  Additionally, the death benefit creates an immediate legacy or estate, just from the stroke of a pen. Whole life insurance provides options and thinking of it as an “and” account that has a death benefit and possibly LTC and Waiver of Premium riders helps out even more.

7. Talking More Than Listening

As advisors, it is easy to fall into the mindset that you have all of the information your client could want, so you must do all the talking. Though not entirely wrong, it is important to remember that the client is an individual, and he or she will have unique problems. Your client wants to be heard, and when you slow down and listen you might find there is a unique way to handle the situation. Typical financial planning tends to have a cut and dry formula for clients, setting up qualified plans left and right, and selling the products advisors are told to sell.

What sets a prosperity economics advisor apart is their willingness to look at the individual’s desires and provide real strategies to achieve prosperity. While it may be a smart move for one client to borrow against their CV and be their own banker, it might be more prudent for a newer client to take out a bank loan and only dip into their CV to bail them out should things go south. Families with few children will have different desires than families with many. As an advisor, set yourself apart by taking the time to listen to your client, and help them find the best strategy, instead of pitching them the typical plan.




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Is It Better to Rent A Home Or Buy?

In this article, I am going to tell you something you already know, or sort of.  To make sure I need you to answer a question;  Is it better to rent a home or buy?  The overwhelming response to that question is it better to purchase a house instead of renting one.

Although you answered the question that it is better to purchase a home, I am going to use Truth Concepts calculators to prove it to you.  Don’t stop reading because you think you know it all.  Stick with me and I am sure you will like the results. Plus there is a bonus idea at the end if you read it all.

Using a Maximum Potential calculator I am going to illustrate your rent costs over a 30 year time period.  I am assuming your initial rent is $1,000 a month and there is 4% inflation in rent in your area.  As you see below the total amount of rent checks you will write over that time is $673,019.

If you were to purchase the exact same house let’s say the purchase price would be $360,000.  In the current economic environment, we could get a 4%, with a 20% down payment ($60,000), 30-year mortgage.  Using the Loan Analysis calculator we see the following:

The most glaring thing you will notice is that the monthly payment is initially about 40% more expensive, $1,432.25 versus the $1,000 a month rent.  Looks like to me if we limit our vision of the problem to the initial monthly cost then renting is cheaper.  But then you notice that the total amount of mortgage checks for purchasing the house is $515,609.  Oops, looks like purchasing is cheaper.

Wait a minute are we really comparing apples to apples?  No, of course not, when you are renting and the toilet springs a leak what do you do?  Call the landlord and they come and fix that leak.  A similar process happens with every other problem with the house.  In some cases, the landlord takes care of the landscaping including mowing the lawn.  So we need to think about repair costs as well as other maintenance fees.  Oh and don’t forget the property insurance and property tax.

Using the same Maximum Potential calculator we can calculate how much you will spend on these items.  Please note in the annual income (really a cost in our story) I put the total monthly cost of the property tax, insurance, and repair, i.e. $375.  I then multiply that by 12 to get the $4,500.  The following is the result:

So in addition to the mortgage, we have an additional cost of $252,382 for purchasing a house, bringing the total to $767,991.  We also have to consider the down payment.  Like I assumed you decided to avoid private mortgage insurance so you came with 20% or the purchase price or $60,000.  At this point, it looks a bit more expensive to purchase a house than to rent.  (Purchase is $827,991 versus renting $673,010.)

With a lot of variables and issues, it might seem hard to actually know which is the best. Luckily at Truth Concepts, we have a calculator to help us out.  (Really do we need to KNOW if it is cheaper to buy a house versus renting?  We already know it is better to buy.  We know because everyone knows that.)

The Real Estate Analysis calculator is useful in our current situation – evaluating the purchase of a personal residence.  When you enter the numbers from above and click on the “personal residence” button right above the ROR box, you get the following:

Are you surprised by the result the calculator helps us to arrive at?  Like I said, I am going to tell you something you already know.  It is better to purchase a house than to rent it, from a financial point of view.

Let now consider some other reasons people feel that buying is better such as:

1)  Appreciation of the asset over time, that we enjoy as the owner.

2)  Tax advantages that we have not discussed, but the calculator allows us to account for them.

3)  Equity build-up that we get back when we sell the house.

4)  There is an emotional sense of pride from ownership.

5)  Control of the asset.  In other words, you can make changes to the house as you see fit.  You can put up a new wall or take one down, paint, nail etc.

6) You can borrow against your equity!

You should be asking yourself, why is this article even written?  Everyone knows that purchasing a home is better than renting.

Here is the heart of this article:  Purchasing life insurance is better than renting it.  (Whole life versus UL or term.)  Why is whole life better?  For all the reasons this article has pointed out and then some.

Now for the bonus, I promised: Can you see a new way to use our awesome software to help your clients see the WHOLE truth about financial decisions?


-Jason Henderson for Truth Concepts

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Why You Shouldn’t Retire, You Should Retool (John & Jane Jones Pt. 8 of 9)

“I am ready to retire,”  John was quick to state at the beginning of our annual meeting.

There were several things I wanted to talk to John and Jane Jones about this year since they would be soon turning 60.  But when I heard John say this, my plans for the meeting took a back seat.

“Are you serious?”  I asked John.  “Do you think you are ready to retire?”

“I have no idea,”  John answered.  “I am making nearly $185,000 a year, which is a lot more than what I was making when I started, but it sure does not seem like we are getting anywhere.”

Jon was frustrated and I needed to learn more about the source of the frustration, so I started to ask him a few questions. “Do you have any idea how long of life expectancy you have?  There is a great website out there called  Let’s go to that site and take the short test to get a projection of how long of a life you should be planning for.”

Once we went through the questionnaire the result that came back shocked John and Jane.

“Whoa, I could end up living to age 110?”

“That is a long time.  Let’s put things in perspective.  You started your career when you were 25, correct?  Which means you have been working about 36 years,”  I said.  “Taking a wild guess, do you think you can afford a retirement of 50 years, assuming you do live to 110?”

“Of course not,”  John answered.  “We have been good savers and you have helped us navigate a bunch of difficult financial decisions.  But we have been saving less than 100% of our income.  There is no way I can live for 50 years on what we have saved.  Especially since our standard of living is much higher than the $45,000 salary I had when I started.”

“Is your salary really that much higher?”  I asked,  knowing the answer.  “Let’s put your numbers into a Future Value Calculator to see what your salary should be in 35 years to have the same purchasing power, as it does today,”  I suggested as I input the numbers.

“That is nearly exactly what we are making now. No wonder we feel like we are spinning our wheels sometimes,”  Jane said.

“I am going to call up another calculator called the Future Requirement Calculator.  Do you think you could help me plug in the numbers?”  I asked.

“My current salary is $185,000.  My qualified plan, as of the last statement, had $158,640,” John told me,  “We are in the 28% tax bracket and we live on about 60% of our income.  I will get some Social Security, so I am thinking I will need about 75% of my current income for retirement”

Does this look right? I asked.

“Yes, I guess so,” John said, “I really do not know, but the numbers you have are correct.”

I chuckled at his honest response.  “You are right, so far this is not telling us much is it?  When I push the ‘projections’ button the calculator will show us how much you should have in savings to make it through a loooong retirement.”

“That is depressing,”  John exclaimed.  “I don’t have anything near 4.6 million dollars.  How will I ever be done with this job?”

“Please, don’t despair,”  I reassured John.  “This calculator is simply useful as a reality check.  But you said it so I have to ask:  why is it you want to retire?”

“I am tired of my job.  I don’t like it anymore,”  John admitted.

“There is nothing wrong with that,”  I said.  “Tons of people get bored with what they have been doing for 20+ years and they think they should retire when they should just rethink what they are doing.  When a client tells me what you just told me I send them to a website called  It has a lot of great information to help when thinking about retooling for a different career,”  I explained.

“I told John this idea of retiring now was not a good idea,”  Jane said.  “John is in good health.  It is just the job that is the problem.   We have actually been looking around and are thinking about starting a business.”

“Not to be too blunt here, but now you are talking better sense,”  I said with a chuckle.  “What kind of company are you thinking of starting?”

“Well, we think this new field of Cryotherapy has a great future,”  John said.  “Medicaid will actually pay a good price for people to use the equipment we are thinking of buying. But, frankly, I am not sure we can do that either.  We will need to purchase two office buildings that would total $250,000.  Plus two cryotherapy and two vibrotherapy machines for $206,000. ”

“John, don’t be discouraged.  We have known each other for a long time.  I always say you need to know the whole truth about things so you can make informed decisions.  This is a great opportunity to look at as much of the truth as we can about this new business so you can make a good decision.”

“First, let’s take a look at the real estate purchases.   The purchase price was $250,000, right?  And the closing costs were $5,000.  How much are you planning to put down?”  I asked.

“We want to avoid private mortgage insurance, so we will put $50,000 down,”  John said.

“Ok great. What about the taxes, insurance and maintenance costs?”  I asked

“All three are about $500 each,”  John responded.  “And we plan to have the business pay us $2500 a month in rental income.”

“We will look at this over a ten year period,”  I said and pointed to the screen, “How does that look?”

“The rate of return isn’t all that great,”  John said.  “I was hoping for more.”

“This is only part of the equation,” I explained.  “The real money maker will hopefully be the business.  For that analysis, we are going to use a new copy of the same calculator.”

I entered the numbers and asked a few questions.  “What do you see as your employee costs per month as well as your insurance for the company and maintenance costs?”

“We plan to be open 13 hours a day 6 days a week.  We do not want to just hire minimum wage employees, we are hoping to provide a great service and we think we will need to pay employees a little higher than most.  We calculated it would be about $10,000 per month in employee costs.”

Sounds good so far,”  I said.  “what will it cost per visit for a client?”

“About $75.  At least that is in line with what Medicaid will pay,”

“You said you will be open 13 hours a day six days a week, which is essentially 4.5 weeks a month,”  I commented.  “How many clients per hour will you be able to handle?”

“I am not sure how many we will be able to handle, but we think a conservative number is 2 per hour,”  Jane said.

I input all these numbers in the income line and showed them the calculator.

“Now that is a rate of return I like to see,”  John said excitedly.

“As I have said before, it is not about net worth, it is about cash flow,”  I said. “In this case, it’s not about rate of return it should also be about cash flow, and notice how much monthly cash flow you should have,”  I pointed to the screen.

“That is more than I am making now,”  John said.  “Maybe I can retire after all.”

I smiled at him and said, “How about we say you can retool and still have a good income?”

“OK, I like that better.  I need to stay healthy and active,”  John agreed and started to get up.

“Are you finished John?”  I said with a grin.

“I thought we were,”  he said.

“I would like to talk to you about one more thing,”  I said.

“OK, go ahead,”  John said easing back into his chair. He was visibly more relaxed.

“$28,000 in income from the business each month is a lot more than what you are making now.  What do you plan to do with that extra money?”  I asked.

“We are going to enjoy life,”  John said.

Jane was a little more serious and said, “We haven’t thought that far ahead.”

“I am not changing the subject, so stay with me.  What do you think has been one of your best investments so far?  I mean other than the policies you have purchased because we all know that everything else you have invested in or financed was made possible by those policies.”

“Without a doubt, the cabin has been the best.  It has not been a huge moneymaker, but as far as making family memories and personal value to us, the cabin wins hands down,”  John said.

“I agree with John,”  Jane said smiling at him.  “We got it for a great price and have enjoyed it more times than I can count.”

“Exactly what I thought,” I said.  “What made it possible for you to purchase the cabin?”

“The policies,”  John replied.

“Technically that is a correct answer, but I am asking you to think a little deeper here,”  I said.

After a moment of silence, Jane finally said, “What made it possible was our willingness to save a significant portion of our income.  What I mean is, we had policies that had cash and because we could move fast, we were able to buy the cabin.”

“Exactly,”  I complimented Jane.  “You are not too old to save.  Who knows, maybe something else will come along.  Even if nothing does though you need a place to store the extra cash you are going to have with this new business.  If we plan on you paying about 30% in taxes, you will easily have another $100,000 a year coming in.  Is there a better place to store cash than inside a policy?”  I asked.

“When we first met I thought a whole life insurance contract was the worst place to have money,”  John admitted.  “But now, no, there is no better place.  What do you recommend?”

“I think you should purchase a policy for $50,000 a year for each of you,”  I said.  “You can put the purchase of those policies into your operating agreement for the business and make it official.”

“You don’t have to ask me twice,”  John said.  “But I don’t want to pay premium forever.”

“I was going suggest you purchase a 10 pay policy.  That is a policy guaranteed to be paid up in 10 years,”  I explained.

“Sold! Where is the application?”  John asked.

“Wow, if everyone was as easy to sell policies to as you are, I would have an easier time,”  I said.

“You have our trust.  You have always just shown us the whole truth of things and then we make our own decisions.  Not once have you lead us astray,”  John said.

“It is hard to go wrong with a whole life insurance contract,”  I said.  “I like the peace of mind it gives me personally knowing my clients are protected and will not lose money.  That means I have never had to apologize for recommending or selling a whole life insurance policy.”

“Thank you,”  Jane said.  “Really, thank you.”

“Let’s get the applications filled out,”  John said.  “I want to celebrate our decision for me to retool!”


-Jason Henderson for Truth Concepts 


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How $155 in Credit Card Debt Becomes $38,850 In Payments! (John & Jane Jones Pt. 1 of 9)

Credit card debt

In the movie Mr. Mom, Jack (Michael Keaton) is fired from his job as an automobile engineer.  Jack’s wife, Caroline (Teri Garr) lands a job before he can, so Jack takes on what he believes is the easy job of homemaker and caretaker.

The movie has many humorous scenes.

One particular scene Caroline’s boss comes to pick her up for a business trip.  Jack does not want to come across as some helpless person so quickly gets in work clothes and comes into the house carrying a chainsaw.  He asks the boss if he wants a beer, to which the boss replies, “it is 7:00 in the morning.”  The conversation continues to be awkward as Jack remarks that he is doing a little remodeling.  The boss asks Jack if he is going to be doing the electrical wiring and if he plans to use 220-volt wiring.  Jack’s response, “Yeah 220, 221 whatever it takes” is classic.Michael Keaton in Mr. Mom

Jack’s reply discloses how little he understood about electrical requirements for a modern house in the United States.  Very few appliances actually use 220-volt electricity, but nothing – and I repeat, nothing – uses 221 volts.  A simple 1-volt difference makes a huge difference.

So it is also with money – small things can make a huge difference. That was the case with some recent clients, Jane and John Jones.

As always, during our first visit with Jane and John, we collected as much financial information about them as we could using our fact-finding worksheet.  The two of them had been married for a few years and were in their mid 20’s.  Jane’s parents had been using a whole life insurance policy as a place to save for Jane’s future since she was a small child and had gifted the policy to her after the wedding.  John was certain the policy was a big rip off based on what he had heard from radio and TV personalities.

He wants to cancel the policy.  Jane did not, and of course, neither did her parents; they insisted John come in to meet with us.

One of the pieces of information we gathered was that John came into the marriage with “about $20,000” in credit card debt.  The minimum payment on this $20,000 debt was $370 per month.  That payment every month was simply killing them.  In fact, one of the first things John said when we talked was, “We have $20,000 in credit card debt and we must get rid of it.”  His solution was surrendering the policy and using the cash to pay off the debt.

For the purposes of this article, I am not going to spend much time on the fate of the policy but will simply illustrate why accurate numbers and clear understanding of money can make all the difference in the world – in other words, why knowing the whole truth is important.

The credit card company was charging the Jones 22% interest on their debt.  When we plug the numbers into one our Truth Concepts calculators (see below), we see it will take about 260 months to pay off the debt. That is 21 years and 8 months with a $370 per month payment if they didn’t make any additional charges.  Don’t be surprised by this enormously long time period to pay for credit card debt when paying the minimum amount.

Most people do not understand it, but thanks to the laws of the land, the credit card companies are required to print on every statement how long it will take to pay off the debt if a person only pays the minimum amount.

We have worked with a lot of people and because of the Truth Concept software, we knew having accurate numbers, ie: the whole truth, was very important.

So we dug a little deeper. We asked John to get the exact amount of the credit card debt, which was actually $20,155.  If you’re thinking that isn’t a big difference, you’ll be as surprised as John was.   Just like Jack in the movie Mr. Mom, John did not understand the importance of those “little” numbers.  But take a look at the same calculator calculating the actual debt amount in loan balance:

Notice how a measly $155 in additional debt causes the number of months required to pay off that debt to jump roughly 105 months!  Those numbers mean that $370/month x 105 additional months = $38,850 more John and Jane end up paying for their debt.  That is no small amount of money, in fact, I would say it’s staggering. When we showed the two love birds this difference we certainly got their attention.

When it comes to money, financing, saving, and investing, understanding the whole truth about a situation can make a world of difference.  You should work with competent people who work to educate and empower you to make better financial decisions.


-Jason Henderson for Truth Concepts 


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Clarifying Mortgage Interest Deductibility

Real estate investmentOn a mastermind call with Summit attendees a few months ago, Kim Butler asked Todd Langford to share about some misconceptions about mortgage interest deductibility, and the truth of the matter. We had this portion of the call transcribed and thought it might be helpful to you, too!

Kim:  Todd is going to share a little bit about the deductibility of mortgage interest discussion that comes up almost every Truth Training. There’s really no way to show this in the form of a calculator but it is a very valuable piece of information.

Todd, tell us, if you would, how we should be thinking about and explaining the area of deductibility of interest around our mortgages, especially when we have higher income?

Todd:  One of the things that we hear in the field a lot of times mainly from CPAs, they talk about the fact that over a certain amount of income your mortgage deduction gets phased out and the words “phased out” are what’s used most of the time. This is a really a poor word choice, and I’ll explain how it works.

Think about this… “phase out,” what that says to you in your mind. I think for most people what that says is, “Well after a certain amount of income, the amount of my deductions get cut off,” and that’s really not true. What happens, in reality, is for every $1 million worth of income, there’s about $30,000 worth of deductions that are eliminated, and it’s the first $30,000 not the last $30,000 that is eliminated.

In other words, let’s say that somebody has got $1 million worth of income, and they’ve got $30,000 worth of charitable deductions. Then all of those charitable deductions are going to be eliminated. They are not going to get credit for it because they are losing again about—and that’s approximate—but it’s about $30,000 per $1 million of income.

What we are being told by using the words “phase out” is that there is a cap or a limit on the amount of deductions you can receive, and that’s not the case.

What’s happening is the first amount, like I said earlier, is what’s taken away. So, if I’ve got $30,000 worth of charitable deductions, then that’s going to automatically be eliminated as far as what I can deduct. What I’m going to want to do is then have more deductions. In other words, an interest deduction would actually add the amount that I’m deducting, so then I would actually get some (more deductions).

As an example, if I’ve got $30,000 worth of charitable deductions, $30,000 worth of mortgage deductions, $30,000 is going to be taken away if I’ve got $1 million of income and I’m going to get the $30,000 that comes on top of that which would be in this case the mortgage deduction whereas the other way, if I didn’t have the mortgage deduction I would get no deductions at all.

So this idea that if you are a high income earner you should pay off your house because you are not getting mortgage deductions anymore is just not true. You want as many deductions as you can since the first X amount is going to be eliminated based on income. Does that make sense?

Kim:  It does to me, yes. So let’s say that somebody is saying to you, “Okay I have all these charitable deductions” – maybe it’s all in their mind) – “$3,000, and I have $40,000 of mortgage interest and I earn $1 million. So I’ve got $3,000 of charitable, $40,000 of mortgage interest, I earn $1 million.” Can you walk us through the example of this one more time so we get it clear?

Todd:  Sure. In that case, what would happen is $43,000 basically would be your total amount of scheduled deductions in that scenario. So $30,000 is going to come off of that which would leave you with the other $12,000 actually you would get to deduct.

Again, the more deductions we have, the more likely that we are going to get some deductible assets. If you think about it, most people that are making $1 million a year of taxable income probably have $30,000 worth of charitable deductions already in some form.

So, anything we can add to that is going to help us get across the $30,000 threshold so that we actually get some deductibility, whereas, like I said, most of the time the accountants are saying you “phase out” at a certain point so now the deductions aren’t doing really good… The reality is the more deductions we have, then the more likely we are actually going to get some.

Kim:  Super. That helps a lot. Let me give it a shot and see if there are any questions for Todd on this issues.

Kate:  This is Kate and I’ve got a question. Isn’t this also true at any income level to some extent? Because I know even at lower income levels, you’ve got to reach a certain amount of deductions before you can itemize. When I was a home owner, that always got me over that threshold and into that land of, “OK, now I can itemize and take advantage of my charitable deductions.”

But there was a period when I wasn’t a home owner, and I realized I couldn’t even deduct my charitable deductions because I didn’t have enough deductions to get me into that land, so then I was only getting the standard deductions, which meant fewer deductions than when I’m a home owner.

Todd:  Absolutely. That’s obviously part of the issue with your standard deductions if you don’t have other deductions then you are just going to take the standard deductions. But like Kate was saying, if you’ve got that home mortgage that’s probably going to kick you up to the area where it definitely makes sense to itemize and then you get to bring your charitable deductions and other deductions. Like I said, that $30,000 per $1 million is just a rule of thumb. It’s not exact and it varies between 0 and a million as to what that deductible amount is going to be.

If you have questions for Todd, we recommend attending our next Truth Training, or The Summit for Prosperity Economics Advisors held each summer.


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