Income Taxation Valencia Tax Chapter 5: Exclude From Gross Income

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

22

Chapter 5: Exclusion from Gross Income

CHAPTER 5

EXCLUSION FROM GROSS INCOME Problem 5 – 1 TAXABLE 1 Taxable . 2 Nontaxable . 3 Taxable . 4 Nontaxable . 5 Taxable . 6 Nontaxable . 7 Nontaxable . 8 Taxable . 9 Nontaxable . 10. Nontaxable

OR NONTAXABLE with income tax 11. Taxable 21. Nontaxable

Problem 5 – 2 TAXABLE 1 Nontaxable . 2 Taxable . 3 Nontaxable . 4 Taxable . 5 Nontaxable . 6 Nontaxable . 7 Taxable . 8 Taxable . 9 Taxable . 10. Nontaxable

OR NONTAXABLE with income tax 11. Taxable 21. Nontaxable

12.

Taxable

22.

Taxable

13.

Nontaxable

23.

Nontaxable

14.

Taxable

24.

Taxable

15.

Nontaxable

25.

Nontaxable

16.

Nontaxable

17.

Taxable

18.

Taxable

19.

Taxable

20.

Taxable

12.

Taxable

22.

Nontaxable

13.

Nontaxable

23.

Taxable

14.

taxable

24.

Nontaxable

15.

Nontaxable

25.

Nontaxable

16.

taxable

26.

Taxable

17.

taxable

27

Nontaxable

18.

Nontaxable

28

Taxable

19.

Nontaxable

29

Taxable

20.

Nontaxable

30

Nontaxable

Problem 5 – 3 TRUE OR FALSE 1. True 2. False – only Philippine charity sweepstakes are not subject to tax in the Philippines. 3. False – subject to normal tax, in general 4. False – nontaxable because the other income is subjected only to final tax. 5. True

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

Chapter 5: Exclusion from Gross Income

6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

True False – Proceeds of life insurance is not taxable regardless of whoever would be the recipient, except when the insured person outlived his life insurance and received the proceeds. The excess of proceeds over premium paid is taxable. False – include in gross income False – Bequest is a personal property. True True True False – nontaxable because it is just a return of expenses True, in general False – nontaxable

Problem 5 – 4 TRUE OR FALSE 1. True 2. False – nontaxable because aliens are taxable only for income derived within the Philippines. 3. False – the P3M capitalization does not include the land asset of BMBE. 4. True 5. True 6. False – nontaxable 7. False – nontaxable in general 8. True 9. True 10. False – some prizes and awards are exempt by law from taxation. 11. True 12. True 13. False – Include in gross income because income from gift is subject to income tax. 14. False – Tax-exempt 15. True Problem 5-5 1. D 2. D 3. C 4. C 5. A 6. D 7. C 8. D 9. A 10. C

Problem 5-6 1. A 2. D 3. D 4. B 5. A 6. B 7. C 8. B 9. D 10. D

Problem 5 –8 A Basic minimum wage 13th month pay 15-day monetized unavailed vacation leave Overtime pay Holiday pay Christmas bonus (de-minimis) Total nontaxable income

Problem 5-7 1. B 2. D 3. C 4. D 5. B 6. D 7. A 8. D 9. C 10. D P 90,000 7,500 3,750 24,000 2,250 5,000 P132,500

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

Chapter 5: Exclusion from Gross Income

Problem 5 –9 B 13th month pay Deductible from gross compensation income: SSS contribution Philhealth contribution Amount excluded from gross income

Problem 5 –10 Dividend income

P 6,500 P3,000 2,500

5,500 P12,000

C P 60,000

Interest income on EFCD to be taxable in the Philippines must be transacted with residents. Problem 5 –11 B Income from the Philippines: Wagwag business (P5,000 x 12) Sari-sari store (P20,000 x 12) Gross taxable income in the Philippines Problem 5 –12 D 13th month pay (P390,000/13) De minimis with the ceiling amount: Rice subsidy (P1,500 x 12) Clothing allowance Amount of nontaxable compensation

P 60,000 240,000 P300,000 P30,000 18,000 4,000 P52,000

The excess of rice subsidy over the ceiling is already taxable, because the 13th mo. pay is already P30,000. Problem 5 –13

C

Total basic salary 13th month pay Excess rice subsidy De minimis rice subsidy (P24,000 – P6,000) Total nontaxable compensation

Taxable P240,000 . P240,000

Nontaxable 20,000 6,000 18,000 44,000

The P6,000 excess of rice subsidy is still exempt because if combined w/13th mo pay and other benefit the amount does not exceed P30,000. Problem 5-14 D MWE Basic salary Overtime pay Hazard pay Holiday pay 13th mo. Pay Excess rice subsidy Rice subsidy w/in ceiling

P 96,000 20,000 2,000 1,000 8,000 6,000 18,000

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

Chapter 5: Exclusion from Gross Income

Total nontaxable Taxable

P151,000 P 0

Problem 5-15

B Taxable

MWE: Basic salary o.t. pay hazard pay holiday pay 13th mo.+ similar benefits: 13th mo. Pay Excess rice subsidy Excess clothing to complete P30,000 Rice subsidy – de minimis Clothing allowance Total

Nontaxable

P108,000 30,000 2,000 1,000

13,000 . P154,000

9,000 18,000 3,000 18,000 4,000 P52,000

An employee who receives additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of P30,000, taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay, night shift differential pay and hazard pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are no longer exempt from income tax. Problem 5-16

D Taxable

MWE: Basic salary o.t. pay

96,000 20,000

13th mo.+ similar benefits: 13th mo. Pay Excess rice subsidy Rice subsidy Rent income Interest income, 4,000/80% Total

Nontaxable

8,000 6,000 18,000 60,000 5,000 181,000

32,000

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

Chapter 5: Exclusion from Gross Income

MWEs receiving other income, such as income from the conduct of trade, business, or practice of profession, except income subject to final tax, in addition to compensation income are not exempted from income tax on their entire income earned during the taxable year. 5-17 D Only P1,500 sickleave benefit actually taken.

Problem 5 –18 C Take home pay Nontaxable 13th month pay Withholding tax Other income subject to normal tax Taxable income

P212,000 ( 17,500) 13,500 20,000 P228,000

In general, a MWE is not subject to WTW and income tax on his compensation income. But if he has other income that is subject to normal tax, his entire income during the year will be subject to income tax, his compensation income, however, will not be subject to WTW. Problem 5 –19

C

Net pay Withholding tax Advances 3th month pay Christmas bonus (de minimis) SSS contribution Totals Problem 5 –20

Nontaxable

Taxable P13,000

Tax-exempt

P27,000 5,000 4,000 P36,000

C

Net take home pay SSS contributions PAG-IBIG contributions Union dues contributions Office party contributions Charitable contribution (deductible only from business income) Withholding income tax Totals Problem 5 –21 D Monthly salary Free board and lodging is for convenience of employer. Problem 5 –22 Rent of apartment Reimbursement Taxable benefits

Taxable P265,000 50,000 6,000 (27,000) ( 5,000) . P289,000

P300 100 100 75 25 400 P13,500

. P500 P15,000

B P 50,000 20,000 P70,000

Note that the tax base to determine the tax liability of supervisor should be the grossed-up amount, meaning P70,000/68%.

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

Chapter 5: Exclusion from Gross Income

Problem 5 –23 D Proceeds of life insurance including 12% interest for 2 years Less: Present value of life insurance proceeds (P1,254,400 x 0.797193877) Interest income - Taxable

P1,254,400 1,000,000 P 254,400

Proceeds of life insurance policy are not taxable but the interest thereof is taxable. (Rev. Rev.2, Sec.22; Sec.32Ba, NIRC) Problem 5 –24 D Proceeds of life insurance policy are not taxable. Problem 5 –25 B Maturity value received Premium paid Premium refund Income in excess of premium paid

P500,000 (490,000) 40,000 P 50,000

The premium refund is actually a decrease of premium paid. Problem 5 –26 D Zero, because, the P270,000 cash surrender value is just a partial return of total contribution of P360,000. Problem 5 –27 D Car insurance Accident insurance Life insurance as beneficiary Cash surrender value of life insurance Participating dividend Total amount excluded from gross income

P300,000 100,000 500,000 30,000 10,000 P940,000

The participating dividend and cash surrender value are considered return of premium. The interest income, however, is included in the gross income. It represents income from the use of insurance proceeds not yet taken. (Sec. 62, Regs. No. 2) Problem 5 –28 1. Letter C Total premium paid – excluded

P500,000

The total premium paid is excluded because such amount represents return of capital. [Sec. 32 (B)(2), NIRC] 2.

Letter A Total consideration received – excluded

P2,000,000

The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured are excluded from the gross income of the beneficiary. [Sec. 62, Regs. No. 2; Sec. 32 (A) (1), NIRC] Problem 5 –29

D

Actual damages for unrealized profit Interest on non-taxable damages

Taxable P100,000 20,000

Nontaxable

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

Chapter 5: Exclusion from Gross Income

Actual damages for lost products Exemplary damages due to injuries Moral damages due to injuries Actual liquidated damages Total

. P120,000

P200,000 50,000 50,000 80,000 P380,000

Note: On the part of Ernie Barron, the attorney’s fee is only a reimbursement of his judicial expenses, but on the part of the counsel, such amount is reportable income. Problem 5 –30 Taxable income

A P -0-

Problem 5 –31 A The retirement pay should be included in the gross income because Max retired at an optional age and has rendered less than 10 years in service. To be excluded from gross income, an employee should have been in the service of the same employer for at least ten (10) years and at least 50 years at the time of his retirement. [Sec. 32 (B)(6)(a), NIRC] Problem 5 –32 C Cost of life annuity contract Divided by expected return (P360,000 x 15 years) Cost ratio Multiplied by annual pension Annual amount of pension excluded from gross income Problem 5 –33

P1,350,000 5,400,000 25% 360,000 P 90,000

D Taxable

Terminal pay Life insurance SSS death benefit Donations Totals

. P - 0 -

Nontaxable P 60,000 500,000 10,000 40,000 P610,000

Problem 5 –34 A The termination is due to cause within the control of Jalosjos, separation pay is taxable. Problem 5 –35 D Last pay upon resignation from his first employer

P100,000

Problem 5-36 B SSS death benefit of P36,000 Problem 5-37 A Sickness benefit (P300 x 6 days x 90) Maternity benefit (P300 x 78 days x 100%) Total exclusion

P 1,620 23,400 P25,020

SSS sickness benefit is equal to 90% of daily salary credit after compliance with certain conditions. SSS daily maternity leave benefit is equivalent to the average daily salary credit for 60 days or 78 days in case of caesarian delivery, subject to certain conditions. [Sec. 14, R.A. 1161; R.A. 8282, as amended] Problem 5 –38

A

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

Chapter 5: Exclusion from Gross Income

Zero, all items enumerated are not subject to income tax. Problem 5 –39 C Interest income from bank savings deposit, subject to final tax at source

P4,000

His annual income from professional fee is not more than P60,000 which is exempt. Problem 5 –40 D Zero. Gifts are generally subject to donor’s tax and are not subject to income tax. Problem 5 –41 D Total income (P100,000 x 10 months) Total average expenses (P20,000 x 10 months) Income subject to income tax

P1,000,000 ( 200,000) P 800,000

Problem 5 –42 D Zero. All winnings received by Miss Lara are subject to tax because she has entered into a contest (Miss International) which requires rendition of subjstantial future services as a condition to receive such prize or award. Problem 5 –43 Lotto Philippine winnings

A P10,000,000

Problem 5 –44 B Ramon Magsaysay award Athlete of the year award Prize for winning the silver Olympic medal Cash award from Mr. Lim Car from Nissan Winnings – Philippine sweepstakes Total winnings/awards not subject to income tax Problem 5 –45 A Interest income Gain from sale of bonds classified as capital asset Taxable income

P

50,000 100,000 500,000 250,000 1,000,000 100,000 P2,000,000 P 60,000 140,000 P200,000

Interest income on government bonds is taxable. Gain from sale of certificate of indebtedness is tax-exempt only when the maturity is more than 5 years. [Sec. 32 (B)(7)(g), NIRC] Problem 5 –46 B Interest received from bond investment

P 120,000

Problem 5 –47 Interest income

P120,000

B

Problem 5 –48 D Interest on expanded foreign currency deposit Problem 5 –49 A Income from sale of invented products Sale of technology Total revenue Less: Research and development costs Nontaxable income

P100,000 P5,000,000 2,000,000 P7,000,000 800,000 P6,200,000

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

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Chapter 5: Exclusion from Gross Income

Note: The cost of product produced need not to be deducted anymore because of the term “income from sale of invented products.” Problem 5 –50 C Interest income on bank savings deposit

P10,000

Problem 5 –51 C Interest income from foreign currency deposit Interest income from time deposit Total taxable income

P2,000,000 1,000,000 P3,000,000

Problem 5 –52 1. Compensation income (P5,000 x 10)

P 50,000

2.

Retirement benefits Salary earned Gross income

P500,000 50,000 P550,000

3. Same answer with No. 1

P 50,000

Problem 5 –53 Winnings from charity horse race sweepstakes from PCSO Gains from redemption of shares in mutual fund Gain from sale of bonds with maturity of more than five years Gifts from friends Total exclusion from gross income

P 500,000 300,000 60,000 200,000 P1,060,000

Problem 5 –54 Proceeds of his life insurance (P2,000,000) – (P15,000 x 25) Proceeds of his mother’s life insurance Cash gift Inheritance Rent income Total

Exclude P 375,000 1,000,000 50,000 3,000,000 . P4,425,000

Include P1,625,000

100,000 P1,725,000

Problem 5 –55 No, the P1,500,000 transfer to be received by Miss Tandana is to be included for income taxation because the transfer is in recognition of her services rendered. It is not to be included as a part of estate tax. Problem 5 –56 Dividend income Interest income Prizes Total taxable income

P50,000 2,000 25,000 P77,000

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

Chapter 5: Exclusion from Gross Income

Problem 5-57 1. None – the taxpayer is a MWE and the benefits does not exceed the allowable statutory amount of P30,000. 2. Gross compensation SSS premium Philhealth premium Taxable compensation income

P109,200 ( 2,400) ( 3,000) P103,800

Problem 5 -58 Answer for both no. 1 and no.2 Compensation SSS premium Philhealth Gross taxable compensation income

P128,000 (2,400) (3,000) P122,600

Note: The MWE with earnings subject to normal tax shall be taxable for his entire income during the year. Problem 5 -59

1 .

2 .

Time deposit

P60,000

Foreign currency deposit Cooperative income subject to final tax

10,000 P70,000

Cooperative income subject to normal tax

P -0-

The cooperative’s ordinary income such as sales and income from lending to members are not subject to income tax.