Income Taxation Valencia Roxas Tax Chapter 14: Income Taxes of Estates &Trusts

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

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Chapter 14: Income Taxes of Estates & Trusts

CHAPTER 14

INCOME TAXES OF ESTATES & TRUSTS Problem 14 – 1 TRUE OR FALSE 1. False – P20,000 2. True 3. True 4. True 5. True 6. True 7. False – It shall be in writing either as trust inter-vivos or through a will. 8. False – A trustor is the person who establishes the trust, not the trustee. 9. True 10. True 11. True 12. True Problem 14 – 2 TRUE OR FALSE 1. False – A taxpayer is required to file ITR regardless of the result of business whether there is income or loss; hence, the ITR of irrevocable trust should be filed if its income is P20,000 and below. 2. True 3. True 4. True 5. False – The income is taxable. 6. True 7. True 8. False – special deduction related to amount distributed to beneficiary is not allowed when a trust is administered in a foreign country. [Sec. 61 (C), NIRC] 9. True 10. False – Since the trusts are irrevocable, their income should not be combined with the income of the trustor. Problem 14 – 3 1. B 2. C 3. A 4. D 5. B 6. A 7. A 8. B 9. D 10. C 11. C

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Chapter 14: Income Taxes of Estates & Trusts

Problem 14 – 4 D Gross income Less: OSD (P200,000) Net income Less: Basic personal exemption Net taxable income

P200,000 80,000 P120,000 50,000 P70,000

The estate can deduct greater amount of deductions by using OSD. Section 35(C) of NIRC provides that if the taxpayer dies during the taxable year, his estate may still claim personal and additional exemptions for himself and his dependents. In the given problem, Mrs. Ayugat can claim her basic personal exemption of P50,000 but she cannot claim additional exemptions because her husband is the proper claimant of the additional exemptions unless the husband waives his right or has no income taxable in the Philippines.. [Sec. 79(F), NIRC] Problem 14 – 5 Note: Since the requirement is tax savings, if is to be assumed that OSD shall be used to determine the lower amount of tax. Correction: Requirement 2 should be: … of the estate of Mathai’s mother. 1.

Letter B Gross business receipts of Mathai’s estate after death Less: OSD (P400,000 x 40%) Net income before personal exemption Less: Absolute exemption Net income subject to income tax

P400,000 160,000 P240,000 20,000 P220,000

It must be noted that the P400,000 represents the income of the estate after death. It does not include the income before death. In this case, the applicable exemption would be P20,000 because the income of Mathai before his death could deduct the basic personal exemption of P50,000. 2.

Not in the choices = P5,000 Income tax when no income of estate was distributed (Case 1 + Case 3) (P59,000 + P8,500) Less: Income tax when P150,000 of estate’s income was distributed (Case 2 + Case 4) = (P35,000 + P27,500)

P 67,500 62,500 P 5,000

Tax savings Supporting computations: Gross business receipts Distribution to the beneficiary Balance OSD – 40% Net income before personal exemption Personal exemption Net taxable income Income tax for first bracket Income tax on excess Case 1: (P280,000 – P250,000) x 30%

Case 1

Case 2

Case 3

Case 4

500,000 . 500,000 (200,000) 300,000 (20,000) 280,000

500,000 (150,000) 350,000 (140,000) 210,000 (20,000) 190,000

200,000 . 200,000 (80,000) 120,000 (50,000) 70,000

200,000 150,000 350,000 (140,000) 210,000 (50,000) 160,000

50,000

22,500

8,500

22,500

9,000

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Chapter 14: Income Taxes of Estates & Trusts Case 2: (P190,000 – P140,000) x 25% Case 4: (160,000 – 140,000) x 25% Total income taxes

12,500 . 35,000

. 59,000

. 8,500

5,000 27,500

Problem 14 – 6 1.

Letter C Gross business income Less: Business expenses Net income before personal exemption Less: Personal exemption – basic Net taxable income

P320,000 200,000 P120,000 50,000 P 70,000

Tax on P70,000

P

8,500

Naty Goc cannot claim the additional exemption of her minor child because her husband is deemed head of family and proper claimant of the additional exemption. [Sec. 79(F), NIRC] 2.

Letter A Income tax due – case 2 & case 3 (P2,500 + P4,000) Less: Income tax due – case 1 Income tax savings – 200y Gross income Itemized Amount distributed – child OSD (P200,000 x 40%) Net income before exemption Personal exemption Net taxable income Tax on P140,000 Tax on P30,000 Tax on excess: Case 1: (P40,000 x 25%) Case 3: (P10,000 x 15%) Income tax due

P 6,500 32,500 (P26,000)

Case 1* P500,000 (300,000) . P200,000 ( 20,000) P180,000 P22,500 10,000 . P32,500

Case 2* P500,000 (300,000) (150,000) . P 50,000 ( 20,000) P 30.000

Case 3* P150,000 ( 60,000) P 90,000 ( 50,000) P 40,000

P 2,500

P2,500

. P 2,500

1,500 P 4,000

*Case 1 – Income tax of the estate (no portion is distributed to heir). *Case 2 – Income tax of the estate (P150,000 is distributed to heir). *Case 3 – Income tax of the heir (P150,000 is received from estate). The tax saving is brought about by splitting the taxable income between taxpayers thus lowering the taxable income to lower tax rate and availing two personal exemptions.

Problem 14 – 7 1. Letter C Gross income

200x P 5,000,000

200y P 6,000,000

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Chapter 14: Income Taxes of Estates & Trusts

Operating expenses allowed Amounts given to beneficiaries 200x (P680,000/85%) 200y (P765,000/85%) Personal exemption Net taxable income Tax on P500,000 Tax on excess: 200x: (P880,000 x 32%) 200y: (P1,380,000 x 32%) Income tax due

(2,800,000)

(3,200,000)

( 800,000) ( 20,000) P1,380,000

( 900,000) ( 20,000) P1,880,000

P125,000

P125,000

281,600 . P406,600

441,600 P566,600

The absolute exemption of P20,000 is to be used for the income of Mr. Anao’s estate while Mr. Anao’s income will used the basic personal exemption of P50,000. 2.

Letter A 200x Amounts received by wife 200x: (P425,000/85%) 200y: (P510,000/85%) OSD (40%) Personal exemption Net taxable income Tax on P250,000 Tax on excess (P60,000) Income tax due Less: Creditable withholding tax 200x: (P500,000 x 15%) 200y: (P600,000 x 15%) Income tax refund Less: 200x income tax refund 200y’s tax refund is lower by

3.

200y

P500,000 (200,000) ( 50,000) P250,000

P600,000 (240,000) ( 50,000) P310,000

P 50,000 . P 50,000

P 50,000 18,000 P 68,000

75,000 . P 25,000

Letter C Amount received by Mr. Tag Anao, son in 200y (P255,000/85%) OSD (40%) Personal exemption Net taxable income Tax on P70,000 Tax on excess (P60,000 x 20%) Income tax due Less: 200y Creditable withholding tax (P300,000 x 15%) Income tax refund

90,000 P 22,000 25,000 (P 3,000)

P300,000 (120,000) ( 50,000) P130,000 P

8,500 12,000 P 20,500 45,000 (P24,500)

A beneficiary of an estate engaged in business has the status of self-employed individual taxpayer. It follows, therefore, that such beneficiary can claim the itemized deduction or optional deduction in the computation of his net taxable income. Furthermore, the amount paid to the beneficiary has not been subjected to business expenses.

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Chapter 14: Income Taxes of Estates & Trusts

Problem 14 – 8 C Income of trust Less: Amount distributed to the heir (P85,000/85%) Absolute exemption Net taxable income of trust

P400,000 P100,000 20,000

Problem 14 – 9 1. Letter B Amount received from trust B (P4,800,000/80%) x 20% Rent income (P285,000/95%) Total income before OSD Less: OSD (P1,500,000 x 40%) P600,000 Basic personal exemption 50,000 Net taxable income Tax on P500,000 Tax on excess (P350,000 x 32%) Income tax due Less: CWT on amount received from trust (P1,200,000 x 15%) CWT from rent income (P300,000 x 5%) Income tax still due and payable 2.

120,000 P280,000

P1,200,000 300,000 P1,500,000 650,000 P 850,000 P125,000 112,000 P237,000

P180,000 15,000

195,000 P 42,000

Letter C Net income before exemption Less: Exemption Net taxable income Tax on P500,000 Tax on excess: Trust A (P3,480,000 x 32%) Trust B (P4,280,000 x 32%) Income tax due of each trust Total income tax due (P1,238,600 + P1,494,600)

Trust A P4,000,000 20,000 P3,980,000

Trust B P4,800,000 20,000 P4,780,000

P 125,000

P 125,000

1,113,600 . P1,238,600

1,369,600 P1,494,600

P2,733,200

In case of more than one trust, the creator of the trust in each instance is the same person and the trustee in each instance is the same but the beneficiaries are different, the trustee should make a separate return for each of the trusts in his hands. When a trustee holds trust created by different persons for the benefit of the same beneficiary, he should also make a return for each trust separately. (Sections 208 & 215, Rev. Regs. No. 2; Sec. 60 (C)(2), NIRC]

Problem 14 – 10 1. Letter B Income of the grantor Income of trust A - revocable Total income of the grantor Less: Total expenses

P1,000,000 500,000 P1,500,000

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INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 14: Income Taxes of Estates & Trusts

Grantor – business expense Trust A – business expense Grantor’s income before personal exemptions

P400,000 200,000

2. Letter D Income of trust B – irrevocable trust Less: Expenses of irrevocable trust – B Net income before exemption Less: Exemption Net taxable income of all the trust

600,000 P 900,000 P200,000 100,000 P100,000 20,000 P 80,000

Assume beneficiary opted to use OSD. 3. Letter D Income of beneficiary Add: Share from trust Total gross income Less: OSD (P150,000 x 40%) Net income before personal exemption Less: Personal exemption Net income

P100,000 50,000 P150,000 60,000 P 90,000 50,000 P 40,000

Problem 14 – 11 1. Letter A The trust is not taxable because it is revocable. The supposed income tax of the trust shall be included in the income tax of Mr. Tan. 2.

Letter D Net income of Mr. Tan Less: Basic personal exemption Net taxable income Tax on P500,000 Tax on excess (P1,450,000 x 32%) Income tax due

P2,000,000 50,000 P1,950,000 P125,000 464,000 P589,000

Note: Only the income of irrevocable trust is entitled for special deduction. 3.

Letter A Since the amount given to the daughter is not considered as deduction from irrevocable trust, such amount is considered allowance. Therefore, not subject to tax.

Problem 14 – 12 1. Conjugal gross income from estate Less: Business expense (P5,000,000 x 40%) Income distributed to beneficiaries Conjugal net income 200x income tax due from the estate of Mr. Baguingan:

P5,000,000 P2,000,000 600,000

2,600,000 P2,400,000

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INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 14: Income Taxes of Estates & Trusts

Income share of Mr. Baguingan’ estate (P2,400,000 x 50%) Less: Exemption Taxable income

P1,200,000 20,000 P1,180,000

Tax on P500,000 Tax on excess (P680,000) x 32%) Income tax due

P 125,000 217,600 P 342,600

The estate of Mr. Baguingan will acquire a new TIN and file a separate ITR claiming P20,000 absolute exemption. If Mr. Baguingan has income in 200x prior to his death, such income shall be filed separately using his TIN and allowed to deduct basic exemption as if he died at the close of the taxable year. 2. Compensation income Add: Income received from trust Total income before personal exemption Less: Personal exemptions (P50,000 + P100,000) Net taxable income

P250,000 200,000 P450,000 150,000 P300,000

Tax on P250,000 Tax on excess (P50,000 x 30%) Income tax due

P50,000 15,000 P65,000

Note: Unless the taxpayer signifies in his ITR his intention to elect the OSD, he shall be considered as having availed himself of the itemized deductions. (Sec. 34(L), NIRC) Alternative solution: If beneficiary opted to use OSD Compensation income Add: Income received from trust, net of OSD (P200,000 x 60%) Total income before exemption Less: Personal exemptions: Basic Additional (P25,000 x 4) Taxable income of Mrs. Diana Nievera

P250,000 120,000 P370,000 P 50,000 100,000

150,000 P220,000

Tax on P140,000 Tax on excess (P80,000 x 30%) Income tax due

P 22,500 24,000 P 46,500

Total amount received by the children Multiply by withholding tax rate Total withholding taxes

P600,000 15% P 90,000

3.

Problem 14 – 13 Tax savings: Income tax when no income of estate was distributed (Case 1 + Case 3) (P122,000 + P8,500) Less: Income tax when P150,000 of estate’s income was distributed (Case 2 + Case 4) = (P86,000 + P42,500) Tax savings

P131,400 128,500 P 2,900

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Chapter 14: Income Taxes of Estates & Trusts

Supporting computations year after death:

Case 1

Case 2

Case 3

Case 4

Gross income Business deductions: Itemized deductions Distribution to beneficiary Net income before personal exemption Personal exemption Net taxable income

800,000

800,000

300,000

300,000

(260,000) . 540,000 (20,000) 520,000

(260,000) (150,000) 390,000 (20,000) 370,000

(180,000) . 120,000 (50,000) 70,000

(180,000) 150,000 270,000 (50,000) 220,000

Income tax for first bracket, P500,000 Income tax for first bracket, P250,000 Income tax for first bracket, P140,000 Income tax for first bracket, P70,000 Income tax on excess Case 1: (520,000 – 500,000) x 32% Case 2: (370,000 – 250,000) x 30% Case 4: (220,000 – 140,000) x 25% Total income taxes

125,000 50,000

22,500 8,500

6,400 . 131,400

Problem 14 – 14 1. Income tax payable by the trust in 200x: Income from house and lot Income from hollow block business (P10,000 x 12) Income from farm Total gross income from trust Less: Related expenses (P250,000 x 30%) Amount distributed to the beneficiary Net income before exemption Less: Exemption Net taxable income

36,000 . 86,000

. 8,500

P 80,000 120,000 50,000 P 250,000 P 75,000 50,000

Tax on P70,000 Tax on excess (P35,000 x 20%) Total income tax payable 2.

20,000 42,500

125,000 P 125,000 20,000 P 105,000 P

8,500 10,500 P 19,000

Income tax payable from the beneficiary in 200x: Gross income received from income of trust Less: Personal exemption Net taxable income

P 50,000 50,000 P 0 .

Total income tax payable

P

0

.

Note: Unless the taxpayer signifies in his ITR his intention to elect the OSD, he shall be considered as having availed himself of the itemized deductions. (Sec. 34(L), NIRC) Alternative solution – if Trust and beneficiary opted to use OSD 1.

Total gross income – trust Less: OSD (P250,000 x 40%) Amount distributed to the beneficiary Net income before personal exemption Less: Personal exemption Net taxable income Tax on P70,000

P250,000 P100,000 50,000

150,000 P100,000 20,000 P 80,000 P 8,500

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Chapter 14: Income Taxes of Estates & Trusts

Tax on excess (P10,000 x 20%) Total income tax payable 2.

2,000 P10,500

Gross income received from income of trust Less: Optional standard deduction (P50,000 x 40%) Net income before exemption Less: Personal exemption Net taxable income

P50,000 20,000 P30,000 50,000 (P30,000)

Total income tax payable

P

0

.

Problem 14 – 15 Correction: The requirement should be stated as: How much is the income tax due of the two trusts? Total net income of trusts (P50,000 + P1,000,000) Less: Distribution to beneficiary (P10,000 + P20,000) Exemption Net taxable income

P1,050,000 P 30,000 20,000

50,000 P1,000,000

Tax on P500,000 Tax on excess (P500,000 x 32%) Income tax due and payable

P125,000 160,000 P285,000

Problem 14 – 16 Note: Since the topic is tax planning and the requirement is tax savings, OSD can automatically assumed to be used to determine the lower tax. 1.

Gross receipts Less: OSD (P300,000 x 40%) Net income before personal exemption Less: Exemption Net income subject to income tax

P300,000 120,000 P180,000 20,000 P160,000

The P300,000 is the business gross receipts of the estate; therefore, subject to P20,000 exemption. 2.

Income tax when no income of estate was distributed (Case 1 + Case 3) (P59,000 + P8,500) Less: Income tax when P150,000 of estate’s income was distributed (Case 2 + Case 4) = (P35,000 + P27,500)

Tax savings

P 67,500 62,500 P 5,000

Supporting computations: Gross business receipts Distribution to the beneficiary Balance OSD – 40% Net income before personal exemption Exemption Net taxable income

Case 1

Case 2

Case 3

Case 4

500,000 . 500,000 (200,000) 300,000 (20,000) 280,000

500,000 (150,000) 350,000 (140,000) 210,000 (20,000) 190,000

200,000 . 200,000 (80,000) 120,000 (50,000) 70,000

200,000 150,000 350,000 (140,000) 210,000 (50,000) 160,000

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Chapter 14: Income Taxes of Estates & Trusts

Income tax for first bracket Income tax on excess Case 1 (P280,000 – P250,000) x 30% Case 2 (P190,000 – P140,000) x 25% Case 4: (160,000 – 140,000) x 25% Total income taxes

50,000

22,500

8,500

22,500

12,500 . 35,000

. 8,500

5,000 27,500

9,000 . 59,000

Problem 14 – 17 1. To minimize income tax, Dokling can do the following: a. Put his business under irrevocable trust b. Use OSD instead of itemized deduction because the OSD is greater than the itemized deduction, and c. Claim his child’s allowance as amount of distribution to beneficiary from the income of the trust. 2.

Tax exposure before the creation of trust: Gross income Less: OSD (P400,000 x 40%) Net income before personal exemption Less: Personal exemption Net taxable income

P400,000 160,000 P240,000 50,000 P190,000

Tax on P140,000 Tax on excess (P50,000 x 25%) Income tax due

P22,500 12,500 P35,000

Note: The allowance is not deductible because the child is not established as beneficiary of the trust. Furthermore, the business is not in trust. 50% of the business is created as irrevocable trust: Grantor: Income tax if 50% is held in trust (irrevocable) Gross income (50%) Less: OSD (P200,000 x 40%) Net income before personal exemption Less: Personal exemption Net taxable income

P200,000 80,000 P120,000 50,000 P 70,000

Tax on P70,000 Trust: Income tax if 50% is held in trust (irrevocable) Gross income (50%) Less: OSD (P200,000 x 40%) Distribution to beneficiary Net income before personal exemption Less: Exemption Net taxable income Beneficiary: Share from the income of trust Less: OSD (P100,000 x 40%) Net income before personal exemption Less: Personal exemption Net taxable income

( 8,500)

P200,000 P 80,000 100,000

P180,000 P 20,000 20,000 P - 0 P100,000 40,000 P 60,000 50,000 P 10,000

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Chapter 14: Income Taxes of Estates & Trusts

Tax on P10,000

(

Tax savings

500) P26,000

Problem 14 – 18 Note: Since the topic is tax planning, the taxpayer should use OSD instead of itemized deduction because using OSD can give a greater tax savings based on the given data of this case. 1.

2.

2.

Rent income Less: OSD (P800,000 x 40%) Net income before personal exemption Less: Personal exemption Net income

P 800,000 320,000 P 480,000 50,000 P 430,000

Tax on P250,000 Add: Tax on excess (P180,000 x 30%) Income tax due

P 50,000 54,000 P104,000

Rent income – Property 2 Less: OSD (P300,000 x 40%) Net income before personal exemption Less: Personal exemption Net income

P 300,000 120,000 P 180,000 50,000 P 130,000

Tax on P70,000 Add: Tax on excess (P60,000 x 20%) Income tax due Less: Income tax property no. 1

P

Rent income – Property 1 Less: OSD (P500,000 x 40%) Net income before personal exemption Less: Personal exemption Net income

P 500,000 200,000 P 300,000 20,000 P 280,000

Tax on P250,000 Tax on excess (P30,000 x 30%)

P 50,000 9,000

Tax savings

8,500 12,000 ( 20,500)

( 59,000) P 24,500