The Risks Of Change And Complexity

At the Constitutional founding of the United States, Publius (John Jay, Alexander Hamilton, and James Madison) wrote in The Federalist:

It will be of little avail to the people that the laws are made by men of their own choice if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood; if they be repeated or revised before they are promulgated, or undergo such incessant changes that no man who knows what the law is today can guess what it will be tomorrow.

Can anything contradict these founding principles more than the current federal income tax laws? At present, the Internal Revenue Code (IRC) court cases, regulations, interpretive rulings, and journal commentary take up more than one million pages of text. Moreover, the Internal Revenue Service (IRS), the U.S. Department of the Treasury, and Congress change or threaten to change the tax laws on an almost daily basis.

Given this high degree of complexity and instability, you may decide to shun the field of taxation and turn all of your financials over to a tax pro. Unfortunately, such planned ignorance can cost you thousands (or even hundreds of thousands) of dollars. Instead, as a smart, tax-savvy investor, at least learn the basics of tax law. In doing so, you will discover what tax questions to ask your adviser, and perhaps, even more importantly, you will learn how to plan your tax strategy to legally reduce or avoid the amounts governments extract from you.

All too often, naive investors act, and then ask their tax pro to calculate their taxes. The tax savvy investor first anticipates the tax effects of various alternatives. Then chooses with tax payments or savings clearly in view.

With those words of advice in mind, let's review federal income tax law and look at some of the ways owning a personal residence can save you income taxes.

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