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Tel. No. 735-9807 & 734-3989

TAXATION
TAMAYO/GARCIA
TX 501: INCOME TAX (INDIVIDUALS, ESTATES AND TRUSTS)
1. Classification of Individuals
a. Citizens
1) Those who are citizens of the Philippines at the time of the adoption of the
Constitution (on February 2, 1987);
2) Those whose fathers or mothers are citizens of the Philippines;
3) Those born before January 17, 1973 of Filipino mothers who elect Philippine
citizenship upon reaching the age of majority;
4) Those who are naturalized in accordance with law.
1) Resident
A citizen of the Philippines residing therein.
citizen
2) Non-resident
1) A citizen of the Philippines who establishes to the satisfaction of the
citizen
Commissioner the fact of his physical presence abroad with a definite
intention to reside therein;
2) A citizen of the Philippines who leaves the Philippines during the taxable year
to reside abroad, either as an immigrant or for employment on a permanent
basis;
3) A citizen of the Philippines who works and derives income from abroad and
whose employment thereat requires him to be physically present abroad
most of the time during the taxable year;
4) A citizen who has been previously considered as non-resident citizen and who
arrives in the Philippines at any time during the taxable year to reside
permanently in the Philippines shall likewise be treated as a non-resident
citizen for the taxable year in which he arrives in the Philippines with respect
to his income derived from sources abroad until the date of his arrival in the
Philippines;
5) The taxpayer shall submit proof to the Commissioner to show his intention of
leaving the Philippines to reside permanently abroad or to return to and reside
in the Philippines as the case may be.
b. Aliens
Individuals who are not Filipinos.
1) Resident alien;
2) Non-resident alien doing business in the Philippines;
3) Non-resident alien not doing business in the Philippines.
1) Resident alien
An individual whose residence is within the Philippines and who is not a citizen
thereof.
1) An alien who lives in the Philippines with no definite intention as to his stay;
2) One who comes to the Philippines for a definite purpose which in its nature
would require an extended stay and to that end makes his home temporarily
in the Philippines, although it may be his intention at all times to return to his
domicile abroad;
3) An alien who has acquired residence in the Philippines retains his status as
such until he abandons the same and actually departs from the Philippines.
2) Non-resident
An individual whose residence is not within the Philippines and who is not a
alien
citizen thereon.
1) One who comes to the Philippines for a definite purpose which in its nature
may be promptly accomplished.
2) A non-resident alien individual who shall come to the Philippines and stay
therein for an aggregate period of more than 180 days during any calendar
year shall be deemed a non-resident alien doing business in the
Philippines.
2. Formats of Computation (Annual Return)
a. Pure
Gross compensation income
compensation
Less: Basic personal exemption
income
Additional exemption
Premium payment for health and/or hospitalization insurance
Taxable compensation income
Tax due [Sec. 24 (A)]
Less: Tax withheld on compensation
Foreign tax credits
Tax payable (overpayment)
b. Pure business or
Gross business/professional income
professional
Less: Allowable deductions
income
Net income before personal exemptions
Less: Basic personal exemption
Additional exemption
Premium payment for health and/or hospitalization insurance

P xxx
xxx
xxx
xxx
xxx
xxx

xxx
xxx
xxx

xxx
P xxx
P xxx
xxx
Pxxx
Pxxx
xxx
xxx
xxx

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c. Mixed income

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Taxable net income


Pxxx
Tax due [Sec. 24 (A)]
Pxxx
Less: Tax credits/payments
Prior years excess credits
xxx
Tax payments for the previous quarters
xxx
Creditable tax withheld
xxx
xxx
Tax payable (overpayment)
Pxxx
Gross compensation income
Pxxx
Less: Basic personal exemption
xxx
Additional exemption
xxx
Premium payment for health and/or hospitalization insurance xxx xxx
Taxable compensation income
xxx
Gross business income
xxx
Less: Allowable deductions
xxx
Net income
xxx
Total taxable income
Pxxx
Tax due [Sec. 24 (A)]
Pxxx
Less: Tax credits/payments
Prior years excess credits
xxx
Tax payments for the first three quarters
xxx
Creditable tax withheld for the first 3 quarters
xxx
Creditable tax withheld for the 4th quarter
xxx
Tax withheld from compensation
xxx
Foreign tax credits
xxx xxx
Tax payable (overpayments)
Pxxx

3. Tax Base and Tax Rate


Taxpayer
a. Resident citizen
b. Non-resident citizen
c. Resident alien
d. Non-resident alien engaged in trade or business
e. Non-resident alien not engaged in trade or
business
f. Estate and trust

Tax Base
Net income within and
without
Net income within
Net income within
Net income within
Gross income within

Tax Rate
Sec. 24 (A)

Net income within and


without

Sec. 24 (A)

Sec.
Sec.
Sec.
Sec.

24
24
25
25

(A)
(A)
(A) (1)
(B)

4. Personal Exemptions
a. Personal
Personal exemptions are arbitrary amount allowed in the nature of a deduction
exemptions
from gross or net income for personal, living or family expenses of the taxpayer.
defined
These have been calculated to be roughly equivalent to the minimum of
subsistence.
b. Kinds of personal
1) Basic personal exemption;
exemptions
2) Additional exemptions.
5. Basic Personal Exemption
a. Taxpayers allowed
1) Resident citizens;
to
2) Non-resident citizens;
claim basic
3) Resident aliens;
personal
4) Non-resident aliens doing business in the Philippines (subject to reciprocity);
exemption
5) Estates and trusts.
b. Amount of basic
Old
New
personal
1)
Single (including married but legally separated, widow P20,000P50,000
exemption
or widower), estates and trusts
2) Head of family
P25,000 P50,000
3) Married (for each working spouse)
P32,000 P50,000
c. Amount of
a. Conditions for allowance:
personal
1) The foreign country of which the NRA-ETB is a subject or citizen has an
exemption allowed
income tax law;
to non-resident
2) The income tax law of the NRA-ETBs country allows personal exemptions to
alien doing
citizens of the Philippines not residing therein;
business in the
3) The NRA-ETB files a true and accurate return of his income from all sources
Philippines (nonwithin the Philippines.
resident alien
b. Amount allowed: The lower between what is allowed in the NRA-ETBs
engaged in trade
country and what is allowed in the Philippines.
or business)
6. Additional Exemptions
a. Taxpayers allowed 1) Resident citizens;
3) Resident aliens;
additional
2) Non-resident citizens; 4) NRA-ETB (subject to reciprocity)
exemptions
b. Amount of
P25,000 (old P8,000) per dependent child
additional

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exemption
c. Maximum number
of
dependent
children
d. Dependents for
additional
exemption
e. Requisites or
qualifications of a
dependent child
f. Proper claimant of
additional
exemption
g. Instances when
the wife can claim
the additional
exemption
h. Claimant of
additional
exemption in case
of legally
separated
spouses
i. Computation of
married
individuals
income tax

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Four (4) dependent children

1) Legitimate child;
2) Illegitimate child;

3) Adopted child.

1) Chiefly dependent upon the taxpayer; 4) Unmarried;


2) Living with the taxpayer;
5) Not gainfully employed.
3) Not more than 21 years old;
The additional exemption for dependents shall be claimed by only one of the
spouses in the case of married individuals. The husband is the proper
claimant.
1) When the husband explicitly waives his right to the additional exemption in
favor of
his wife;
2) When the husband is unemployed;
3) When the husband is a non-resident citizen deriving income from foreign
sources.
1) The additional exemption may be claimed only by the spouse who has
custody of the child or children;
2) The total amount of additional exemption that may be claimed by both shall
not exceed the maximum additional exemption allowed.
1) For married individuals, the husband and wife, shall compute separately their
individual income tax based on their respective total taxable income.
2) If any income cannot be definitely attributed to or identified as income
exclusively
earned or realized by either of the spouses, the same shall be
divided equally between the spouses for the purpose of determining their
respective taxable income.

7. Optional Standard Deductions (OSD) (RR No. 16-2008 as amended by RR No. 2-2010)
1) Persons
The following may be allowed to claim OSD in lieu of the itemized deductions (i.e.
covered
items of ordinary and necessary expenses allowed under Section 34 (A) to (J) and
(M), Section 37, other special laws, if applicable):

2) Determination
of the amount
of OSD for
individuals

a) Individuals
b) Corporations
(1) Resident citizen
(1) Domestic corporation
(2) Non-resident citizen
(2) Resident foreign corporation
(3) Resident alien
(4) Taxable estates and trusts
a) The OSD allowed to individual taxpayers shall be a maximum of forty percent
(40%) of gross sales (if on accrual basis) or gross receipts (if on cash basis)
during the taxable year.
b) The cost of sales in case of individual seller of goods, or the cost of services
in the case of individual seller of services, are not allowed to be deducted for
purposes of determining the basis of the OSD
c) For other individual taxpayers allowed by law to report their income and
deductions under a different method of accounting (e.g. percentage of
completion basis, etc.) other than cash and accrual method of accounting, the
gross sales or gross receipts shall be determined in accordance with said
acceptable method.

8.
Premium Paid on Health and/or Hospitalization Insurance
a. Deductible
Premium on health and/or hospitalization insurance taken by the taxpayer for
premium
himself, including his family and paid for during the taxable year
b. Amount of
P2,400 per family per year or P200 per month whichever is lower
deductible
premium
c. Gross income of
family that can
The familys total gross income does not exceed P250,000 for the calendar year
claim premium
deduction
d. Total family
Total family income includes primary income and other income from sources
income
received by all members of the nuclear family.
e. Examples of
1) Father, mother, unmarried children living together as one household;
nuclear
2) Single parent with children;
family
3) Single person living alone.
f. Claimant of
In case of married taxpayers, the spouse claiming the additional exemption for
premium
qualified dependent children shall be the same spouse to claim the deduction for
deduction
premium payments.

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g. Exercises
1. A married resident citizen has five (5) qualified dependent children. The following information pertain to
his income and expenses in the year 2009:
Salary, net of P20,000 withholding tax
P380,000
Rent expense, apartment house
36,000
Health insurance premium paid
5,000
How much is the taxable compensation income?
2. A single resident citizen has two (2) qualified dependent children. During the year 2009, he earns and
spends the following:
Gross receipts from practice of profession
P750,000
Cost of services
500,000
Expenses in connection with the practice of profession
50,000
Hospitalization insurance premium paid
2,000
How much is the taxable net income?
3. A married individual has four (4) qualified dependent children. He has the following data on income
and expenses
for the year 2009:
Salary, Philippines, gross of withholding tax of P5,000
P 60,000
Gross business income, Philippines
500,000
Business expenses, Philippines
80,000
Gross business income, USA
900,000
Business expenses, USA
100,000
Compute the taxable net income in the Philippines assuming he is
a. resident citizen.
b. non-resident citizen.
4. An individual taxpayer asked you to assist him in the preparation of his tax return for his income in
2009.
He provided you the following information:
Gross sales, Philippines
P1,500,000
Cost of sales, Philippines
500,000
Gross sales, Japan
7,000,000
Cost of sales, Japan
2,000,000
Business expenses, Philippines
200,000
Business expenses, Japan
800,000
How much was the taxable income assuming the taxpayer was a:
a. resident citizen, married and has six (6) qualified dependent children.
b. non-resident citizen, head of family with two (2) qualified dependent brothers under optional
standard deduction.
c. non-resident alien engaged in business, single (his country allows personal exemption of P40,000
to single
Filipinos not residing in that country).
d. non-resident alien not engaged in business, married with four (4) qualified dependent children
(his country allows basic personal exemption of P40,000 to married individuals and additional
exemption of P10,000 for each dependent child to non-resident alien including Filipinos in that
country).
5. A husband and wife, resident citizens, with one (1) qualified dependent child, had the following income
and expenses for the year 2009. The husband waived the additional exemption in favor of his wife.
Salary of the husband, net of P50,000 withholding tax
P 450,000
Salary of the wife, gross of P60,00 withholding tax
600,000
Gross professional income, husband, gross of 15% withholding tax
1,500,000
Cost of services, husband
500,000
Expenses, practice of profession
300,000
Gross sales, wife
800,000
Cost of sales, wifes business
300,000
Business expenses, wife
100,000
Gross rent income, lease of common property, gross of 5% withholding tax
700,000
Expenses, leased common property
200,000
Business income, Singapore
600,000
Business expenses, Singapore
150,000
Question 1 - How much was the taxable income of the husband and wife using itemized deduction?
2 How much was the taxable income of the husband and wife using optional standard
deduction?
9. Head of Family
a. Meaning of head of
family

The term head of family means an unmarried or legally separated man


or woman with any one of the following as dependent:

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b. Requisites or
qualifications of
dependents of head
of
family

c. Senior citizen
d. Requisites or
qualifications of
senior
citizen as dependent
of a
benefactor
e. Benefactor
f. Benefactor of senior
citizen not entitled to
claim additional
exemption
g.
Exemptions/discounts
of
senior citizens

h. Meaning of living
with

i. Meaning of chief
support

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1) one or both parents;


2) one or more brothers or sisters; one or more legitimate, illegitimate,
recognized natural or adopted child;
3) senior citizen.
1) Dependent parent/s
a) Living with the taxpayer;
b) Dependent upon the taxpayer for chief support.
2) Dependent brother, sister or child
a) Living with the taxpayer;
d) Unmarried;
b) Dependent upon the taxpayer for chief support; e)
Not gainfully
employed.
c) Not more than 21 years old;
3) Senior citizen
Senior citizen or elderly shall refer to any resident Filipino citizen aged 60
years old and above.
The senior citizen, whose annual taxable income does not exceed the poverty
level as determined by the NEDA for the corresponding taxable year:
1) must be living with and
2) dependent upon his benefactor for his chief support.
It shall be the duty of the benefactor of a senior citizen to register the senior
citizen as his dependent and himself/herself as benefactor in the RDO having
jurisdiction over the place where he/she and the senior citizen reside.
Benefactor shall refer to any person, whether related to the senior citizen or
not, who takes care of him/her as a dependent.
The benefactor of a senior citizen shall NOT, however, be entitled to claim
the additional exemption of P25,000 (P8,000) per dependent (not exceeding
four) allowable only to a married individual or head of family with qualified
dependent child/children under Sec. 35 (B) of the Tax Code.
1) If the returnable income of a Senior Citizen is in the nature of
compensation income but he qualifies as a minimum wage earner, he shall
be exempt from income tax on the said compensation. He is also
exempted from income tax if his taxable income does not exceed his
personal exemptions.
2) All establishments, supplying certain goods and services for their exclusive
use and enjoyment or availment, shall give a discount of 20%.
3) The monthly utilization of water and electricity by the Senior Citizen
supplied by public utilities will be subject to a 5% discount upon
concurrence of certain conditions.
4) Sale of any goods and services to Senior Citizens shall be exempt from the
value-added tax (e.g. medicines, professional fees of attending physicians
and licensed health workers, medical and dental services, actual fare for
land transportation travel as well as air transport services and sea
shipping vessels, utilization of services in hotels and similar lodging
places, restaurants and recreation centers, admission fees charged by
theatres, cinema houses, etc. funeral and burial services for the death of
Senior Ciitizen)
The term living with does not necessarily mean actual or physical
togetherness at all times and under all circumstances. As long as the other
requirements of the law are met, the dependent is considered living with the
taxpayer, hence qualified, even if he is not in actual physical togetherness
with the taxpayer.
Chief support means principal or main support, not just partial support.
It means that the taxpayer is giving more than 50% of the dependents need
for food, clothing and shelter.

10. Rules on Change of Status


a. Taxpayer marries or
If the taxpayer marries or shall have additional dependents during the
shall have additional
taxable year, the taxpayer may claim the corresponding additional
dependents during
exemption, as the case may be, in full for such year.
the taxable year
b. Taxpayer dies during
If the taxpayer dies during the taxable year, his estate may still claim the
the taxable year
personal and additional exemptions for himself and his dependents as if he
dies at the close of such year.
c. The spouse or any
If the spouse or any of the dependent dies or if any of such dependents
dependent dies,
marries, becomes 21 years old or becomes gainfully employed during the
dependent marries,
taxable year, the taxpayer may still claim the same exemptions as if the
becomes 21 years
spouse or any of the dependents dies, or if such dependent marries, becomes
old
21 years old or becomes gainfully employed at the close of the year.
or becomes gainfully
employed
11. Estate and Trust
a. Definition of estate

Estate refers to the mass of all property, rights and obligations of a person

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b. Definition of trust

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which are not extinguished by his death.


Trust is a right on property, real or personal, held by one party for the benefit
of another.

12. Important Pointers on Estates and Trusts


a. Estate as a taxpayer
An estate is a taxpayer if it is under settlement or administration.
b. Trust as a taxpayer
1) A trust is a taxpayer if under the terms of the trust the fiduciary must
accumulate the
income.
2) A trust is a taxpayer if under the terms of the trust the fiduciary may
accumulate or
distribute the income, in his discretion.
c. When is the income
1) If under the term of the trust the title to any part of the corpus or principal
of the trust taxable
of the trust
to
may be revested to the grantor, the income of the part of the corpus or
the grantor?
principal shall
be taxable to the grantor.
2) If under the term of the trust the income of the trust shall be applied for the
benefit of the grantor, the income that shall be applied for the benefit of the
grantor shall be
taxable to the grantor.
d. Treatment of income
When an estate or a trust is a taxpayer, a distribution of the years income to
distribution of the
an heir or beneficiary is:
years
1) A special item of deduction for the estate/trust;
income to heir or
2) A special item of income to the heir/beneficiary.
beneficiary
e. Computation of
Gross income
xxx xxx
taxable income of
Less: Deductions
the estate or trust
Business expenses
xxx
Distribution of years income to the heir or beneficiary
xxx xxx
Net income before exemption
xxx
Less: Personal exemption
xxx
Taxable net income
xxx
Tax due [Sec. 24 (A)]
xxx
13. Several Trusts with a Common Grantor and a Common Beneficiary
a. Filing of separate
A separate return will have to be filed for each trust by the respective trustee
returns
or fiduciary.
b. Consolidation of the
The separate returns filed by the different fiduciaries shall be consolidated in
separate returns
the BIR allowing against the consolidated taxable income one exemption only
of P50,000.
c. Consolidated income
An income tax shall be computed on the consolidated income.
tax
d. Apportionment of the The tax computed on the consolidated income shall be apportioned to the
consolidated income
different trusts, such that each trust shall have a share in the income tax on
tax
consolidated income.
to the different
The format of computation follows:
trusts
Taxable income of the trust x Consolidated income tax
Taxable income of all trusts
e. Tax payable of each
Each trust shall pay an income tax still due computed as follows:
trust
Income tax apportioned to the trust
xxx
Less: Income tax already paid by the fiduciary of the trust
xxx
Income tax still due
xxx
f. Exercise
Mr. James Santiago created two (2) trusts designating Atty. Mars Bonafe and the Philippine Trust Company as
trustees. The common beneficiary of the two (2) trusts was his son, James II, married, and with two (2)
qualified dependent children. The following data were made available for the year 2009:
Trust No. 1
Trust No. 2
Gross income
P600,000
P700,000
Business expenses
300,000
400,000
Income distribution to beneficiary
100,000
200,000
James Santiago II
Gross income
P800,000
Business expenses
250,000
Income distribution received, gross of 15% creditable withholding tax
300,000
Compute the tax due from:
1) each trust.
2) the consolidated income.

3) each trust after share in the consolidated income tax.


4) James Santiago II.

14. Filing of Returns and Payment of Tax (Estate and Trust)

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a. Who shall file the
return?

b. Gross income is
P50,000 or more
c. In case of two or
more
joint fiduciaries

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The following persons acting in any fiduciary capacity shall file the income tax
return for an estate or trust:
1) Guardians;
5) Receivers;
2) Trustees;
6) Conservators;
3) Executors;
7) All other persons or corporations acting as fiduciary.
4) Administrators;
The return shall be filed if the estate or trust has a gross income of P50,000 or
more during the taxable year.
In case of two or more joint fiduciaries, return filed by one of them shall be a
sufficient compliance with the requirements of the Tax Code.

14. Income Tax Returns (Individuals, Estates and Trusts)


a. Pure compensation
The income tax return shall be filed on or before April 15 of the succeeding
income earner
year.
b. Income from
Quarterly declarations:
business
First quarter
April 15
or practice of
Second quarter
August 15
profession
Third quarter
November 15
Final adjusted return
April 15 of the succeeding year
c. Place of filing of
return

d. Payment of tax

1) Authorized agent banks;


2) Revenue District Officer;
3) Collection agent;
4) Duly authorized city or municipal Treasurer in which the taxpayer has his
legal
residence or principal place of business.
The tax is paid as the return is filed.

e. Exercise
A single taxpayer has the following data for the year 2009 (in thousands):
1st Q
P 40
600
100
500
100

Gross compensation income


Gross sales
Cost of sales
Business income
Business expenses (total itemized)

2nd Q
P 40
500
200
300
150

3rd Q
P 40
400
200
200
100

4th Q
P 40
700
300
400
200

REQ: 1. Compute the tax due and payable for each quarterly return and the annual return using itemized
deductions.
2. Compute the tax due and payable for each quarterly return and the annual return using optional
standard
deduction.
END
THOT: What we have to learn to do, we learn by doing.- Aristotle
jb

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