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Transcript of Taxation Finals
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EXEMPTIONS AND DEDUCTIONS FROM GROSS INCOME
I. DEDUCTIONS vs. EXCLUSIONS
DEDUCTION is an outflow of wealth.
EXCLUSION is an inflow of wealth but is not considered as gross income because there is a law which grants it as exempted from gross income.
Pertains to the computation of Gross Income
Pertain to computation of Net Income
Something received or earned by the taxpayer which do not form part of gross income
Something spent or paid in earning gross income.
Flow of wealth to the taxpayer which are not treated as part of gross income for purposes of computing the taxpayers taxable income due to the following reasons:
a. It is exempted by the fundamental law;
b. It is exempted by a statute; and
c. It does not fall within the definition of income.
The amounts which the law allows to be subtracted from gross income in order to arrive at net income
Note that deductions are outflow of income since they represent money spent or the taxpayers
II. DEDUCTIONS vs. EXEMPTIONS
PERSONAL EXPEMPTIONS are arbitrary amounts allowed for personal, living or family expenses of the taxpayer. The amount has been calculated to roughly equivalent to the minimum of subsistence.
As to amount Refer to actual expenses incurred in the pursuit of trade, business or practice of profession
Arbitrary amounts allowed by law
As to nature Constitute business expenses
Pertain to personal expenses
As to purpose To enable the taxpayer to recoup
Allowed to cover personal, family and
his cost of doing business
As to claimants Can be claimed by all taxpayers, corporate or otherwise
Can be claimed only by individual taxpayers
III. BASIC PRINCIPLES GOVERNING DEDUCTIONS
(1) The taxpayer seeking a deduction must point to some specific provisions of the statute authorizing the deduction; and
(2) He must be able to prove that he is entitled to the deduction authorized or allowed.
Deductions have generally been deemed to be a matter of legislative grace. They are allowed only where there is a clear provision in the statute for the deduction claimed; and where particular deductions are authorized by the statute, no others may be made.
Note that the taxable gross income is affected by exclusions because the latter are omitted from the former and are not reported on the income tax return but it is not affected by deductions because they are subtracted after gross income is determined and are reported on the return.
IV. KINDS OF ALLOWABLE DEDUCTIONS
1. OPTIONAL STANDARD DEDUCTION 2. ITEMIZED DEDUCTIONS (Section 34A K and Section 34M) 3. PERSONAL BASIC EXEMPTIONS AND ADDITIONAL
EXEMPTIONS 4. PREMIUMS ON HEALTH AND HOSPITAL INSURANCE
OPTIONAL STANDARD DEDUCTION
- Default is itemized deduction. In lieu of the itemized deduction (IDs), an individual taxpayer (i.e. resident/non-resident citizen, resident alien, taxable estate and trust) other than non-resident alien, may elect optional standard deduction (OSD) in an amount not exceeding 40% of his gross sales or gross receipts, as the case may be.
- If 40% OSD is higher than ID, then choose OSD in order to arrive at a lesser net income
Who can avail?
a. Citizens who are purely engaged in trade or business;
b. Citizens who are mixed earners both compensation earners and engaged in trade, business or profession;
c. Resident aliens but only those expenses incurred in the Philippines;
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d. Partners in GPPs;
- Only DC, RFC can claim OSD
Who cannot claim OSD?
a. Individual taxpayer earning purely compensation income;
b. Non Resident Aliens;
Note that in IDs, NRA-ETB may claim such deduction but not NRA-NETB. As to OSD, theres no distinction. All NRAs are NOT allowed to claim such deduction.
c. Special employees
Conditions or Requisites:
a. OSD is available only to citizens or resident aliens; thus non-resident aliens are NOT entitled to claim the OSD;
b. The standard deduction is OPTIONAL (i.e. Unless the taxpayer signifies in his return his intention to elect the OSD, he shall be considered as having availed himself of the IDs);
c. Such election, when made by a qualified taxpayer, is irrevocable for the taxable year for which the ITR is made; however, he can change to IDs in succeeding year(s);
d. The amount of standard deduction is limited to 40% of taxpayers gross income; and
e. An individual taxpayer who is entitled to and claimed for OSD shall not be required to submit with his return such financial statements otherwise required by the Tax Code.
- Individuals entitled to avail of IDs are the following:
a. Citizens of the Philippines (RC and NRC);
b. Resident Aliens;
c. Non-Resident Aliens Engaged in Trade or Business in the Philippines;
d. Estates and Trusts
- NRA-NETB are taxed on the basis of their gross income, hence cannot avail of the IDs.
- As to corporations, only DC and RFC may claim deductions. The latter being entitled only with respect to expenses related to Philippine income only.
i. Expenses ii. Interests
iii. Taxes iv. Losses v. Bad Debts
vi. Charitable Contributions vii. Research and Development
viii. Contributions to Pension Trust ix. Depreciation x. Depletion of oil, gas, wells and mines
PERSONAL BASIC EXEMPTIONS AND ADDITIONAL EXEMPTIONS
- Individuals entitled to avail of PBE and AE are the following:
a. Resident citizens of the Philippines;
b. Non-resident citizens with respect only to income derived from Philippine sources;
c. Resident aliens with respect only to income derived from Philippine sources;
d. Non-resident aliens engaged in trade, business or in the exercise of a profession in the Philippines with respect to income from Philippine sources, provided there is reciprocity;
Reciprocity means that the foreign country where the NRA-ETB is a citizen grants exemptions to Filipinos not residing there but doing trade or business therein. The amount granted should NOT exceed the amount of personal exemptions allowed under our laws.
If US grants only 24K as exemptions, then the Philippines grants US NRA-ETB only 24K as exemption.
If US grants 75K as exemptions, the Philippines grants US NRA-ETB only 50K as exemption.
e. Estates and Trusts
RC NRC RA NRA-ETB NRA-NETB
subject to rule
Personal Basic Exemption. Each individual is allowed a basic personal exemption of P50,000. In the case of
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married individuals where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption
Additional Exemption for Dependents. There is allowed an additional exemption of P25,000 for each qualified dependent not exceeding four (4).
- The additional exemption for dependents shall be claimed by only one of the spouses in case of married individuals.
- In the case of legally separated spouses, the additional exemptions may be claimed only by the spouse who has custody of the child or children.
- The total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions for four (4) dependents (Sec. 35 [A,B]) or 100,000.
- Dependent means a legitimate, illegitimate or legally adopted child
- Conditions for a child to be considered a dependent:
Chiefly dependent upon the taxpayer for support;
Living with the taxpayer;
Not more than twenty-one (21) years of age;
Not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.
Change of Status (GR: interpret in favor of the taxpayer)
i. If the taxpayer marries or should have additional dependent(s) during the taxable year, the taxpayer may claim the corresponding personal or additional exemption, as the case may be, in full for such year.
ii. If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependent(s) as if he died at the close of such year.
iii. If the spouse or any of the dependents dies or any of such dependents marries, becomes twenty-one (21) years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or as if such dependents married, become twenty-one years old or become gainfully employed at the close of such year.
PREMIUMS ON HEALTH AND HOSPITAL INSURANCE
a. It must not be more than P2,400.00 a year (or 200.00 a month). The P2,400.00 is the maximum amount that can be claimed as deductions regardless of the amount of the premiums actually paid.
b. The family must have an income of not more than P250,000.00 a year.
Family income means income of the immediate family.
c. The claimant must be the spouse claiming the additional exemption.
Note: For the deductions to be allowed, the payments should be on health and/or hospitalization insurance of the individual taxpayer including his f