Decision Model and Analysis for Investment Interest Expense Deduction and Allocation
Document Type
Article
Publication Date
1-1-2010
Journal / Book Title
European Journal of Operational Research
Abstract
Investment income tax planning requires informed, strategic choices. One must determine the amount of qualified dividends and net long-term capital gain to be included in investment income (against which investment interest expense can be deducted). This choice also determines the residual qualified dividends and net long-term capital gain which enjoy a reduced tax rate. Another important decision is whether all or some of this interest expense should be deducted in the current year or carried forward. This paper puts forward a new approach to formulate these questions as a generalized resource allocation problem which permits analysis of the interdependence between, and the tax consequences of, the above decisions. The commonly used approach - deducting investment interest expense sooner rather than later - we consider myopic since the benefit of deferring some of the deduction is not leveraged. Presented here is a tax planning guideline (a necessary and sufficient condition for optimality) to realize a more forward-looking strategy. We also show that, for certain income structures, the tax savings by deducting a one-dollar investment interest expense may be more than the tax rate on the dollar of investment income that is offset.
DOI
10.1016/j.ejor.2008.12.012
MSU Digital Commons Citation
Lee, Zu Hsu; Deng, Shiming; Lin, Beixin; and Yang, James G.S., "Decision Model and Analysis for Investment Interest Expense Deduction and Allocation" (2010). Department of Accounting and Finance Faculty Scholarship and Creative Works. 43.
https://digitalcommons.montclair.edu/acctg-finance-facpubs/43
Published Citation
Lee, Z. H., Deng, S., Lin, B., & Yang, J. G. (2010). Decision model and analysis for investment interest expense deduction and allocation. European Journal of Operational Research, 200(1), 268-280.
