AST TX 501 INDIVIDUAL, ESTATE AND TRUST TAXATION (BATCH 22).doc

ReSA The Review School of Accountancy 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-ETB’s 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-ETB’s 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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ReSA: The Review School of Accountancy of 7 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 individual’s 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 family’s 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, wife’s 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 dependent’s 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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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 year’s income to distribution of the an heir or beneficiary is: year’s 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 year’s 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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ReSA: The Review School of Accountancy of 7 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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