Decision model and analysis for investment interest expense deduction and allocation

Zu Hsu Lee, Shiming Deng, Beixin Lin, James G.S. Yang

Research output: Contribution to journalArticlepeer-review

3 Scopus citations


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.

Original languageEnglish
Pages (from-to)268-280
Number of pages13
JournalEuropean Journal of Operational Research
Issue number1
StatePublished - 1 Jan 2010


  • Income tax
  • Investment interest expense
  • Linear programming
  • Nonlinear programming
  • OR in strategic planning


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