TAXATION: Individuals, Estates, Trusts

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How to Tax an Individual?
Remember that if the income is already subject to final taxes, such income cannot be reported in regular
income taxation.

Individual with Compensation Income Only

Gross Compensation Income xxxx
Less: Exempt Compensation Income (xxx)
Taxable Compensation Income xxxx

Individual with Business Income only (may use Itemized or OSD)

Gross Sales/Gross Receipts/Gross Revenues xxxx
Less: Cost of Sales/Services (xxx)
Gross Profit from business/profession xxxx
Add: Non-Operating Income xxxx
Gross Income xxxx
Less: (1) Itemized Deduction (xxx)
Taxable Net Income xxxx

If he avails 8% preferential income tax:

Gross Sales/Gross Receipts xxxx
Add: Non-operating income xxxx
Less: 250,000 exemption (xxx)
Taxable Income xxxx

Individual with Mixed Income – graduated tax

Gross Sales/Gross Receipts/Gross Revenues xxxx
Less: Cost of Sales/Services (xxx)
Gross Profit from business/profession xxxx
Add: (1) Taxable Gross Compensation Income xxxx
(2) Non-Operating Income xxxx
Gross Income xxxx
Less: (1) Itemized Deduction (xxx)
Taxable Net Income xxxx

Individual with Mixed Income – 8% preferential tax

For Compensation:
Gross Compensation Income xxxx
Less: Exempt Compensation Income (xxx)
Taxable Compensation Income xxxx

For business/professional income:

Gross Sales/Gross Receipts xxxx
Add: Non-operating income (xxx)
Taxable Income xxxx

Incidental Sales/Receipts/Revenues are to be included in Gross Sales/Gross Receipts/Gross Revenues

Note that if the Net Operating Income is negative, this is treated as net operating loss, to be deducted in the
next 3 consecutive years.

OLD LAW

PERSONAL AND ADDITIONAL EXEMPTION

These are fixed amounts allowed, in lieu of personal and family expenses, to be deducted from taxable gross
compensation income and/or net business/professional income, as the case may be, of an individual taxpayer.
See the table below for application of exemptions to different classification of individual taxpayers:

RC NRC RA NRAETB NRANETB/SAE

Basic Personal Allowed Allowed Allowed Allowed, subject Not Allowed
Exemption to reciprocity
Additional Allowed Allowed Allowed Not Allowed* Not Allowed
Exemption

Additional Exemption for Dependents

These are additional exemptions allowed for supporting child/children as well as persons with disabilities
within the fourth civil degree. The additional exemptions, not exceeding P100,000, shall be allowed to only
one of the spouses. The proper claimant of the additional exemptions is the husband, unless:
(1) The husband waives his right.
(2) The husband has no taxable income subject to regular tax.

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In case of legally separated spouses, the additional exemption shall be claimed by the spouse who has
custody over the child/children or Persons with Disability within the fourth civil degree (PWD). However, the
total combined additional exemption cannot exceed P100,000.

Meaning of Qualified Dependents

In case of Child/Children
The child must be:
(1) Legitimate child, illegitimated child, legally adopted child, or foster child of the claimant
(2) The child is:
(a) Living with the taxpayer
(b) Dependent for the taxpayer’s chief support
(c) Not More than 21 years of age
(d) Even if more than 21 years of age, the child is incapable of self-support due to mental or physical
defects
(e) Not Married
(f) Not Gainfully Employed

In case of PWD
The PWD must be:
(1) Relative by consanguinity or affinity within the fourth civil degree
(2) Living with the taxpayer and dependent upon the taxpayer’s chief support
(3) Not Married
(4) Not Gainfully Employed
(5) A Filipino citizen

Illustration A
In 2017, X, CPA, is a widower who supports the following dependents living with him:

A – Mother of deceased wife, 65 years old, unemployed

B – legitimate child of deceased wife with her first husband, 20 years old
C – Legitimate child, 18 years old
D – Legitimate new born child
E – Brother, 24 years old, physically defective, gainfully employed
F – Nephew, 2 years old, with hearing disability, illegitimate son of his deceased sister
G – Sister, 26 years old, widow, with speech impairment, unemployed
H – Legitimate daughter of his widowed sister, 3 years old
I – Foster child, 5 years old

In September 2017, C married and G became gainfully employed

How much is the additional exemptions allowed to X in 2017 and 2018?

Illustration B
X and Y are husband and wife with six minor children. They were legally separated in 2017, where the custody
of five children were awarded by the court to X, and one child to Y. Y supports her brother Z, who is deaf
mute, unmarried, unemployed and living with her. How much basic and additional exemptions are allowed to
X and Y, respectively?

Illustration C
X, a CPA, and Y, an employee are husband and wife with four minor children. Y supports her 14 year old
brother A, a PWD, living with them. X claims the additional exemptions for their four children. Can Y claim for
additional exemption for her brother who is a PWD?

Assuming they only have 3 children, can Y claim additional exemption for her brother?

EFFECT of Change in Status

(1) The taxpayer marries
The taxpayer may still claim the personal exemption of P50,000. In case the taxpayer has a qualified
dependent before the marriage, he may still claim the additional exemption.

(2) Birth of a Child

The taxpayer may claim the additional exemption in the year the child is born, as if the child is born at
the beginning of the year

(3) Death of a Dependent

The taxpayer may still claim the additional exemption in the year the dependent dies, as if the
dependent died at the end of the year.

(4) The taxpayer dies during the year

Illustration D
Assuming X died in June 1, 2017. He left properties which still earned income after death.

Premium Payments on Health or Hospitalization Insurance (PHHI)

The amount of premiums not to exceed Two thousand four hundred pesos (P2,400) per family or Two hundred
pesos (P200) a month paid during the taxable year for health and/or hospitalization insurance taken by the

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TAXATION: Individuals, Estates, Trusts
taxpayer for himself, including his family, shall be allowed as a deduction from his gross income: Provided,
That said family has a gross income of not more than Two hundred fifty thousand pesos (P250,000) for the
taxable year: Provided, finally, That in the case of married taxpayers, only the spouse claiming the additional
exemption for dependents shall be entitled to this deduction.  

If the individual opted to claim OSD, PHHI may still be claimed as deduction.

Illustration E
Assuming POGI and SEXY are husband and wife. They have 6 children qualified as dependents. The wife pays
P300 per month as premium for health and hospitalization insurance. The insurance payment began in the
month of May during the year. The husband earned P80,000 taxable gross compensation income for the year.
The wife earned P90,000 taxable gross compensation income for the year. How much PHHI may the husband
claim?

Assuming that the husband waives his right to claim additional exemption, how much PHHI may
the wife claim?

Illustration F Individual earning Compensation Income and Professional Income

Assuming POGI, employed as a manager, has the following data for the year 2018:
Salaries 1,200,000
13th month pay 100,000
Gain on exercise of stock option, granted by employer 300,000
Fee received as reviewer of Taxation, gross of 10% CWT 1,000,000
Illegal Cockfight Winnings 200,000
Winnings from horse racing bet 100,000
Interest income from long term deposit 200,000
Prize from chess tournament in Spain 2,000,000

Assuming the employer did not withhold tax on compensation.

Required:
(1) How much is the taxable net income to be reported by POGI in 2018?
(2) How much is the Income tax payable?

A. GRADUATED TAX TABLE (OLD LAW)

Sec. 24 (A) – The tax shall be computed on taxable income in accordance with and at the rates established in the
following schedule:

Over But not over The tax shall be Plus of excess over
- P10,000 5% - -
P10,000 30,000 P 500 10% P10,000
30,000 70,000 2,500 15% 30,000
70,000 140,000 8,500 20% 70,000
140,000 250,000 22,500 25% 140,000
250,000 500,000 50,000 30% 250,000
500,000 - 125,000 32% 500,000

Illustration G Individual Earning business income, other income and compensation income
Assuming POGI, employed as a rank and file employee, conducts his own business. The following data are
available for 2018:
Gross Sales 1,000,000
Cost of Sales 400,000
Interest Income earned abroad 200,000
Interest income from long term deposit 500,000
Interest income from domestic bonds 80,000
Dividend Income from domestic corporation 100,000
Share from net income of GPP 200,000
Salaries from employer 800,000
Interest expense 200,000
Bad debts expense 100,000
Depreciation expense 100,000

Additional information:
(1) POGI donated P100,000 to a private educational institution.
(2) POGI also donated 100,000 to an accredited non-stock non-profit charitable institution.
(3) POGI sold a real property classified as capital asset for P2,000,000. Assessed Value is P1,800,000 and
Zonal Value is P2,100,000.
(4) POGI also sold a non-depreciable vehicle at a gain of P400,000. Holding Period is 2 years.
(5) POGI has an investment in stocks in LUGE Corporation. Cost is P300,000. LUGE Corporation became
bankrupt, thereby rendering the stocks worthless. Holding period is 2 years.

Assuming the employer did not withhold tax on compensation.

Required:
(1) How much is taxable net income of POGI?
(2) Assuming POGI opted to use OSD, how much is the taxable net income?

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Illustration H Income of Husband and Wife

Mr. And Mrs. Delos Reyes, both CPA’s and residents of the Philippines had the following data for taxable year
2018:

Salaries, Mrs. P150,000

Bonus (13th month pay),Mrs. 42,000
Income from practice of Profession, Mr. & Mrs.
(net of 10% withholding tax) 450,000
Expenses – professional practice 120,000
Rental income (net of 5% withholding tax) 190,000
Rental expenses 80,000
Other income, Mr. 80,000
20% of the other income is non-taxable. They have 12 minor children.

Required: Determine the taxable net income of husband and wife.

FILING of RETURNS

Income Tax Return

BIR Form 1700 For Individuals without Due Date - On or before April 15 of next calendar
business; and those not year
qualified under
substituted filing
BIR Form 1701Q For Individuals with Due Date
business, trade or First Quarter – On or before May 15 of the
profession, including non- calendar year
operating income Second Quarter - On or before August 15 of the
calendar year
Third Quarter – On or before November 15 of the
calendar year
BIR Form 1701A For Individuals with Due Date – On or before April 15 of next calendar
business, trade or year
profession, including
compensation income
and non-operating
income

PROBLEM 1
Mr. Jonas POGI created two (2) trusts designating Atty. Amado Villegas and the POGI Trust Company as
trustees. The common beneficiary of the two (2) trusts was his son, Jonas II, married, and with two (2)
qualified dependent children. The following data were made available for the current year:
Trust No. 1 Trust No. 2
Gross Income P 600,000 P 700,000
Business Expenses 300,000 400,000
Income distribution to beneficiary 100,000 200,000

Jonas POGI II
Gross Income P 800,000
Business Expenses 250,000
Income distribution received, gross of
15% creditable withholding tax 300,000

1. How much was the taxable income of trust 1?

2. How much was the taxable income of trust 2?
3. Using the same data in Problem 1, how much was the tax payable of trust No. 1 after considering their
share in the consolidated income tax?
4. Using the same data in Problem 1, how much was the tax payable of trust No. 2 after considering their
share in the consolidated income tax?
5. Using the same data in Problem 1, how much was the tax payable of Jonas II?

PROBLEM 2
Mr. POGI designated two trusts as follows:

Trust Beneficiary Details

Trust 1 Jonas, his son Irrevocable, however Mr. POGI reserves the power to
revest to himself 1/3 of the corpus or income
Trust 2 Jon, his another son Irrevocable, except that P40,000 of the annual income
will be used to pay Mr. POGI’s life insurance premium

Trust 1 and Trust 2 earned P300,000 and P600,000 during the year, respectively. Distributions made by Trust
1 to Jonas amounted to P60,000. Distributions made by Trust 2 to Jon amounted to P50,000.

Required:

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1. Determine the taxable income of both trusts.

PROBLEM 3
Mr. POGI has a business and at the same time is employed as a tax professor in POGI University. Data for
2018 is as follows:
POGI’s payslip is shown below:
Gross Salaries 5,000,000
Less: Absences 100,000
Net Salaries 4,900,000
Less:
SSS contributions 200,000
HDMF contributions 150,000
PhilHealth contributions 200,000
Labor union contributions 200,000
Company loan payments 100,000
SSS loan payments 100,000
Take Home pay 3,950,000

His business data is shown below:

Gross Sales 10,000,000
Cost of Sales 2,000,000
Operating Expenses 1,000,000
General and Administrative expenses 1,000,000
Withholding taxes by customers 100,000
January to September income tax payments 500,000
January to December VAT payments 960,000

Aside from those data above, POGI also has interest income from customer’s notes amounting to 500,000.

How much is the withholding tax on compensation?

How much is the taxable net income of POGI to be reported in 1701A?
How much is the income tax payable by POGI for 2018?

TRAIN LAW EXERCISES

TRAIN LAW INDIVIDUAL GRADUATED TAX RATES

Over Not Over Basic Tax Additional Rate Of Excess Over
250,000 400,000 0 20% 250,000
400,000 800,000 30,000 25% 400,000
800,000 2,000,00 130,000 30% 800,000
2,000,000 8,000,000 490,000 32% 2,000,000
8,000,000 - 2,410,000 35% 8,000,000

STRAIGHT PROBLEMS
PROBLEM 1
Ms. EBQ operates a convenience store while she offers bookkeeping services to her clients. In 2018, her gross
sales amounted to P800,000.00, in addition to her receipts from bookkeeping services of P300,000.00. She
already signified her intention to be taxed at 8% income tax rate in her 1st quarter return.

How much is income tax due?

PROBLEM 2
Mr. A signified his intention to be taxed at 8% income tax rate on gross sales in his 1st quarter return. He has
no other source of income. His total sales for the first 3 quarters amounted to 3,000,000 with 4th quarter
sales of P3,500,000

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Total Sales 500,000 500,000 2,000,000 3,500,000

Less: cost of Sales (300,000) (300,000) (1,200,000) (1,200,000)

Gross Income 200,000 200,000 800,000 2,300,000

Less: Operating Expenses (120,000) (120,000) (480,000) (720,000)

Taxable Income 80,000 80,000 320,000 1,580,000

Determine income tax payable every quarter._____________________

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PROBLEM 3
In 2018, Mr. A owns a nightclub and videoke bar, with gross sales/receipts of P2,500,000. His cost of sales
and operating expenses are P1,000,000 and P600,000, respectively, and with non-operating income of
P100,000.
Determine the income tax due______________________

PROBLEM 4
Mr. A, an officer of ABC Corporation, earned in 2018 an annual compensation of P1,200,000, inclusive of 13th
mo. and OB of P120,000. Aside from employment, he owns a farm, with gross sales of 3,500,000. His cost of
sales and operating expenses are P1,000,000 and P600,000, respectively, and with non-operating income of
P100,000.
Determine the income tax due.________________
Can the taxpayer avail the 8% preferential tax? _________________

PROBLEM 5
Mr. A, a Financial Comptroller, earned annual compensation income in 2018 of P1,500,000, inclusive of 13th
month and other benefits of P120,000 but net of mandatory contributions to SSS and Philhealth. Aside from
employment income, he owns a convenience store with gross sales of P2,400,000. His Cost of Sales and
Operating Expenses are P1,000,000 and P600,000, respectively, and with non-operating income of P100,000.
Assuming the taxpayer opted for 8% income tax rate, how much is the income tax due?______________

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