What is the tax treatment for investment interest expenses in Carol's case?

In this scenario, investment interest expenses are specifically considered in relation to their tax treatment. Investment interest expenses are those incurred to borrow money used to purchase taxable investments. The tax code allows individuals to deduct investment interest expenses, but this deduction is limited.

The correct treatment is that investment interest expenses can only be deducted against net investment income, which includes taxable interest income. This means Carol can claim a deduction for her investment interest expenses, but only to the extent of her taxable interest income. It does not apply against all types of income such as wages or dividends, nor can it be deducted if she does not have any investment income to offset it. Therefore, the correct option reflects this limitation on deductibility.