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 journalArticleResearchpeer-review

2 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)268-280
Number of pages13
JournalEuropean Journal of Operational Research
Volume200
Issue number1
DOIs
StatePublished - 1 Jan 2010

Fingerprint

Decision Analysis
Decision Model
Tax
Deduction
Taxation
Dividend
Planning
Resource Allocation
Resource allocation
Decision model
Expenses
Decision analysis
Optimality
Necessary Conditions
Sufficient Conditions
Income

Keywords

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

Cite this

Lee, Zu Hsu ; Deng, Shiming ; Lin, Beixin ; Yang, James G.S. / Decision model and analysis for investment interest expense deduction and allocation. In: European Journal of Operational Research. 2010 ; Vol. 200, No. 1. pp. 268-280.
@article{777f796f4d724d1b8d1b3f82b6f16adc,
title = "Decision model and analysis for investment interest expense deduction and allocation",
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.",
keywords = "Income tax, Investment interest expense, Linear programming, Nonlinear programming, OR in strategic planning",
author = "Lee, {Zu Hsu} and Shiming Deng and Beixin Lin and Yang, {James G.S.}",
year = "2010",
month = "1",
day = "1",
doi = "10.1016/j.ejor.2008.12.012",
language = "English",
volume = "200",
pages = "268--280",
journal = "European Journal of Operational Research",
issn = "0377-2217",
publisher = "Elsevier",
number = "1",

}

Decision model and analysis for investment interest expense deduction and allocation. / Lee, Zu Hsu; Deng, Shiming; Lin, Beixin; Yang, James G.S.

In: European Journal of Operational Research, Vol. 200, No. 1, 01.01.2010, p. 268-280.

Research output: Contribution to journalArticleResearchpeer-review

TY - JOUR

T1 - Decision model and analysis for investment interest expense deduction and allocation

AU - Lee, Zu Hsu

AU - Deng, Shiming

AU - Lin, Beixin

AU - Yang, James G.S.

PY - 2010/1/1

Y1 - 2010/1/1

N2 - 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.

AB - 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.

KW - Income tax

KW - Investment interest expense

KW - Linear programming

KW - Nonlinear programming

KW - OR in strategic planning

UR - http://www.scopus.com/inward/record.url?scp=69249236979&partnerID=8YFLogxK

U2 - 10.1016/j.ejor.2008.12.012

DO - 10.1016/j.ejor.2008.12.012

M3 - Article

VL - 200

SP - 268

EP - 280

JO - European Journal of Operational Research

JF - European Journal of Operational Research

SN - 0377-2217

IS - 1

ER -