CHAPTER 4

DEDUCTIONS FROM GROSS ESTATES

Deductions from Gross Estate
items w/c the law on estate tax allows to be subtracted from the GE to arrive at
the net taxable estate
to protect the interest of innocent persons who have claims over the GE
there must be a specific provision of the statute authorizing the deduction and
must be able to justify the claim towards the deduction

Rules:
1. deductions presumed to be conjugal deductions
2. those deducted in gross income are not allowed to be deducted in GE
3. deductions must not be compensated by any means
4. generally, deductions only accrue before or until the decedents death, and
before the settlement of estate tax

Valuation:
date-to-death valuation rule: FMV at the time of death; outstanding amount of
the obligation
should be consistent with estate situs principle

Deductions allowed from GE:

Resident/Citizen: Ordinary, Special, Share of Spouse
NRA: Ordinary, Share of Spouse

ELITE
NRA
= World ELITE x (Phil. GE/World GE)


ORDINARY DEDUCTIONS (reduced taxable and distributable estate)

I. FUNERAL EXPENSES
Actual amount (paid or unpaid), 5% of GE, P200,000 whichever is lower
Expenses must be supported by evidences (receipt, invoices) to be deductible
Memorial plans: part of GE, then deduction as funeral expense
include:
o interment/cremation fees
o mourning apparel for spouse and unmarried minor children
o expenses for decedents wake
o fees and charges for the rites and ceremonies
o expenses for death notices
o cost of burial lot, tombstone or monument excluding cost of upkeep
unless it is in the form of legacy
January 1, 1998 medical expenses separated from funeral expenses
to be deducted from conjugal/community property first
nondeductible:
o w/o receipts or documentary evidence
o in excess with statutory limit
o expenses donated/contributed
o expenses after interment


II. JUDICIAL EXPENSES
for the administration, inventory taking of assets , and settlement of the estate
extra-judicial settlement allowed.
expense w/ necessary contribution toward settlement of estate
not beyond last day of filing estate tax return, including extension (6 months and
30 days)
include:
o executor/administrator fees
o attorneys fees
o court fees
o accountants fees
o appraisers fees
o clerk hire
o cost of preserving/distributing estate
o costs of storing/maintaining property
o brokerage fees
nondeductible
o incurred by beneficiary seeking to establish interest over estate
o compensation of trustee for benefit of devisee/legatee
o premiums paid on the bond filed by administrator
o w/o required documentation
o incurred beyond the last day of filing


III. CLAIMS AGAINST ESTATE
may rise from contract, tort, operation of law
claims as something that is owed or obligation to pay
only to the extent of accrued amount as of the decedents death
not to include any reimbursable amount
requisites:
o represents a personal obligation except funeral and medical exp.
o contracted in good faith and for adequate consideration
o valid in law and enforceable in court
o not have been condoned by creditor
substantiation requirements:
o duly notarized except when notarization not part of business policy of
the lender
o duly notarized certification from creditor as to amount and interest
one to certify must not be a relative up to the 4
th
degree of
consanguinity/affinity
if relative, copy of promissory note to be filed with the RDO
o proof of financial capability of the creditor at the time of loan
o statement under oath if loan made 3 years prior to the death


IV. CLAIMS AGAINST INSOLVENT PERSONS
requirements:
o amount initially included as part of GE
o insolvency is proven not merely alleged
o fomula:
claims from insolvent persons
less: recoverable amount = free assets x claim/total liab


V. UNPAID MORTGAGES
unpaid indebtedness secured by a decedents property
must be part of GE at FMV gross of any unpaid mortgage
if decedents own a part of the property, only a proportional amount is
deductible
accommodation loan: loan where the proceeds of the loan went to/borrowed by
another person
treatment: add amount of loan as receivable, then unpaid debt balance as
deductions
= asset mortgaged + accommodation loan amount unpaid mortgage loan


VI. UNPAID TAXES
general rule: taxes incurred prior to the death of decedent and remained unpaid
are deductible
to be deductible: should qualify as claims against estate
taxes deductible:
o property taxes accrued prior to death
o unpaid taxes in income
o gift taxes on lifetime gifts
o excise or transfer tax in connection w/ either sale or distribution. part
of judicial expenses not unpaid taxes
not deductible
o income tax on income after the death
o property taxes not accrued before death
o estate tax


VII. LOSSES
all losses incurred during the settlement of the estate from robbery, theft,
embezzlement, casualty losses
incurred on property included in GE, loss incurred not later than last day of
payment of estate tax
must not be compensated by any means
not been claimed as deduction in gross income


VIII. TRANSFERS FOR PUBLIC USE
for the use of the Government of the Republic of the Philippines or any political
subdivisions as long as used exclusively for public purpose
transfer should be through testamentary succession. Oral transfer not deductible
donated from exclusive property of the decedent unless spouse has written
consent with respect to conjugal property
deemed to be made by decedent alone unless spouse expressly joined
property generally presumed as an exclusive property of the decedent


IX. PROPERTY PREVIOUSLY TAXED
to lessen burden of paying estate tax due to short period of property transfers by
reason of early deaths, vanishing deductions is allowed
conditions:
o property included as GE of present decedent (PrD)
o PrD died w/in 5 years from receipt of property through gratuitous trans.
o must be located in the Philippines
o estate/donors tax have been actually paid on the property
o property must be identified as the one received from prior
decedent/donor
o No similar deduction must have been allowed for the same property in
the estate of the prior decedent (not allowed: w/ prior vanishing deduc)
computations
o value to be taken = lesser bet. FMV date previous transfer and FMV
date of PrDs death
o if several items: lower amount of each item
o initial basis = value taken mortgage paid by PrD
o proportionate deduction = (ELITE + TPU) x InitialBasis/GE
o basis of vanishing deductions = InitialBasis Prop. deductions allowed
o vanishing deductions = FinalBasis x Deduct.Level%
100% within 1 year
80% 1 year 2 years
60% 2 years 3 years
40% 3 years 4 years
20% 4 years 5 years


SPECIAL DEDUCTIONS (allowances permitted by special laws; does not reduce estate)

I. STANDARD DEDUCTION (RA 8424)
P1,000,000 as SD for residents and citizens w/o need of substantiation
not optional, every resident/citizen decedent is allowed

II. FAMILY HOME (RA 8424)
dwelling house and lot of husband and wife or head of the family
includes residential house and residential lot
deduction = FMV of RH&L or P1,000,000 whichever is lower
permanency; decedent is entitled only to 1 family home
rules:
o if unmarried: (RH + RL) compare to P1M
o if RH and RL conjugal/community: (RH + RL)/2 compare to P1M
o if only RH conjugal/community: [(RH/2) + RL] compare to P1M
o if only RL conjugal/community: [RH + (RL/2)] compare to P1M


III. MEDICAL EXPENSES (RA 8424)
costs of medicine, hospital bills, doctors fees, etc.
rules:
o must be incurred 1 year before the death of the decedent
o maximum amount allowed: P500,000
all not classified as medical expenses cannot be allowed as deduction as claims
against the estate


IV. AMOUNTS RECEIVED BY THE HEIRS UNDER RA 4917
allowed as deduction from gross estate if the same was included as part of gross
estate
include:
o retirement benefits received, whether individual or corporate,
provided:
decedent in service for 10 years
decedent not less than 50 years old
retirement benefits availed only once by the decedent
o termination/separation benefits granted due to any cause beyond the
control of the decedent
RA 4917 provides that retirement benefits should not be subject to any
attachment, levy, execution, or any tax
amount classified as exclusive property of the decedent


SHARE OF SURVIVING SPOUSE
share of surviving spouse = 50% of net estate before special deductions
classifications:
Conjugal Partnership
of Gains
Absolute Community
gratuitous transfer during marriage Exclusive Exclusive
acquired (onerous) during marriage Conjugal Community
property acquired from labor during
marriage
Conjugal Community
Conjugal Partnership
of Gains
Absolute Community
fruits/income of common property
during marriage
Conjugal Community
gratuitous/onerous transfer before
marriage or brought to the marriage
Exclusive Community
fruits/income of exclusive property
during marriage
Conjugal Exclusive


ALLOCATION OF DEDUCTIONS
decedent citizen/resident with property w/in and outside the Philippines
expenses/obligations to be allocated if not traceable to a specific country
where the property is located, or the amount of expense exceeds the
statutory limit.
rules:
o when specifically identified per country but exceeds the statutory limit,
allocate using total amount (e.g. funeral and medical expenses)
deduction

= P200,000 x (FE
country
/total FE)
deduction = P500,000 x (ME
country
/total ME)
o when there are no means to trace the deductions, allocate using the
total gross estate (e.g judicial expenses and standard deductions)
deduction = JudExp x (GE
country
/total GE)
deduction = StanDed x (GE
country
/total GE)


NONRESIDENT ALIEN DECEDENT

I. ALLOWED DEDUCTIONS
ELITE: allowable deduction = World ELITE x Phil.GE/WorldGE
Transfer for Public Use: as long as given to the GPH and used exclusively for
public purpose
Vanishing Deduction: property located in the Philippines previously subjected to
estate/donors tax

II. DEDUCTIONS NOT ALLOWED
when decedent is NRA, no deduction shall be allowed unless, when exec.,
admin., or heir includes in the estate tax return the value of properties not
situated in the Philippines (ordinary deductions)
Special deductions