INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) CHAPTER 11

69

Chapter 11: Income Tax of Individuals

INCOME TAX OF INDIVIDUALS

Problem 11 1 TRUE OR FALSE 1. False Qualified dependent parents and siblings are not entitled for additional exemption. 2. False must be more than 180 days. 3. False NRA NBT are not allowed for personal exemptions. 4. True 5. True 6. True 7. True 8. True 9. True 10. True 11. False No personal exemption is allowed to NRANEBT. 12. True Problem 11 2 TRUE OR FALSE 1. False additional exemptions are allowed only for qualified dependent children. 2. False not payment for hospitalization but payment of premium for health and hospitalization insurance provided that the family income does not exceed P250,000 per year. 3. True 4. False 15% of gross income 5. False creditable withholding income tax. 6. False qualified dependent parent and siblings are not entitled for additional exemption. 7. False Tax credit of income taxes paid outside the Philippines is allowed only for resident Filipino citizen. 8. False The creditable withholding tax is 15%. 9. False Gross income includes other income but not compensation income. 10. False Tax-exempt 11. True 12. True Problem 11 3 1. D 2. D 3. A 4. A 5. A 6. B 7. D 8. C 9. C 10. B Problem 11 4 1. D 2. B 3. C 4. A 5. B 6. D 7. B 8. B 9. B 10. A Problem 11 5 1. Not in the choices. P25,000 per child (R.A. 9504) 2. Not in the choices. P50,000 basic (R.A. 9504) 3. B 4. C 5. B 5. B 6. A, B & C 7. D 8. D 9. D 10. C P120,000 50,000 P 70,000

Problem 11 6 A Income from the Philippines (P10,000 x 12) Less: Personal exemption single Income subject to tax in the Philippines

Note: It is assumed that Juan works as OFW for more than 183 days. Income earned by OFW outside the Philippines is not subject to tax in the Philippines. The income from the sari-sari store in the Philippines is earned from January to December of the taxable year. Problem 11 7 C Gross compensation income Philippines (P250,000 x 12) Multiplied by special income tax rate Income tax payable Problem 11 8 A Basic personal exemption of couple: Husband Wife Additional exemptions: 4 qualified dependent children (P25,000 x 4) Maximum amount of personal exemption Problem 11 9 C Only P50,000 basic personal exemption because the taxpayers category is single. P3,000,000 15% P 450,000

P50,000 50,000 100,000 P200,000

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Chapter 11: Income Tax of Individuals

Problem 11 10 B Basic personal exemption Married Additional exemption Total personal exemptions Problem 11 11 C Basic personal exemption Additional exemption (a & b only) (P25,000 x 2) Total personal and additional exemptions

P50,000 25,000 P75,000 P50,000 50,000 P100,000

Problem 11 12 A Basic personal exemption married P 50,000 Nonresident alien engaged in business in the Philippines is allowed of basic personal exemption subject to limit, but additional exemption is not allowed. Personal exemptions for foreigners are subject to the rule of reciprocity with limit of whichever is lower. Problem 11 13 A P200 per month. For the month of December only. Problem 11 14 D No special deduction is allowed. The family income exceeding P250,000 is not allowed for a special deduction for health insurance. Problem 11 15 D Zero. Maria has no income. Problem 11 16 A No net tax payable at the end of the taxable year because the senior citizens income does not exceed P60,000 during the year. The tax withheld from interest income is final tax.

Problem 11 17 1. Not in the choices = P790,000 & P160,000 Compensation income Business and other income: Professional income (P300,000 + P200,000) Interest income without Dividend income without Total net income before personal exemption Less: Basic personal exemption single Net income to ITR tabular tax Interest income within Dividend income within Income subject to final tax 2. Subject to Tabular tax P240,000 500,000 60,000 40,000 P840,000 ( 50,000) P790,000 P100,000 60,000 P160,000 P240,000 300,000 P540,000 50,000 P490,000 P100,000 60,000 P160,000 Final tax

A
Compensation income Business income: Professional income Total net income before personal exemption Less: Basic personal exemption single Net income to ITR tabular tax Interest income within Dividend income within Income subject to final tax

Note: The problem is silent as to whether the taxpayer opted for OSD, hence, OSD should not be deducted from the business gross income. In order to qualify for OSD, the taxpayer should indicate in his return that he is opting OSD instead of itemized deductions. (Sec. 34 (L), NIRC) Alternative Solution of Prob. 11-17: If X opted to use OSD 1. A Compensation income Business and other income: Subject to Tabular tax P240,000 Final tax

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

Professional income (P300,000 + P200,000) Interest income without Dividend income without Total business and other income Less: OSD (P600,000 x 40%) Net business income Total net income before personal exemption Less: Basic personal exemption single Net income to ITR tabular tax Interest income within Dividend income within Income subject to final tax 2. Not in the choices = P370,000 & P160,000 Compensation income Business income: Professional income, net of OSD (P300,000 x 60%) Total net income before personal exemption Less: Basic personal exemption Net income to ITR tabular tax P240,000 180,000 P420,000 50,000 P370,000 500,000 60,000 40,000 P600,000 ( 240,000) P360,000 P600,000 ( 50,000) P550,000

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Chapter 11: Income Tax of Individuals

P100,000 60,000 P160,000

Interest income within Dividend income within Income subject to final tax Problem 11 18 D Net taxable income Income tax Less: Withholding tax Net tax payable Problem 11 19 D Compensation as researcher Less: Personal exemption married Net taxable compensation income Tax on P500,000 Tax on excess (P50,000 x 32%) Total income tax from compensation Dividend income tax (P120,000 x 10%) Interest income tax (P500,000 x 7.5%) Total income tax due Problem 11 20 D Capital gains tax on shares of stock (P80,000 x 5%) Capital gains tax on sale of land (P2,000,000 x 6%) Total capital gains tax paid

P100,000 60,000 P160,000 Husband P140,000 P 22,500 20,000 P 2,500 Wife P250,000 P 50,000 45,000 P 5,000 P 600,000 50,000 P 550,000 P125,000 16,000 P141,000 12,000 37,500 P190,500 P 4,000 120,000 P124,000

Problem 11 21 B 1. B Final tax on copyright royalty (P11,250/90%) x 10% Final tax on mineral claim royalty (P12,000/80%) x 20% Final tax on share from trading partnership as dividend (P270,000/90%) x 10% Total final tax 2. Not in the choices None. All reported earnings are subject to final tax.

P 1,250 3,000 30,000 P34,250

Problem 11 22 B Percent of service Add: Output VAT Total Less: Withholding tax Percent of net proceeds Net proceeds Divided by percent of net proceeds Service fee Withholding tax (P100,000 x 20%)

100% 12% 112% 20% 92% P 92,000 92% P100,000 P 20,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

VAT (P100,000 x 12%) Problem 11 23 1. A Salaries of assistants Traveling expenses Light and water, Office Stationeries and supplies Office rent Total expenses before contribution Add: Contribution subject to limit (P500,000 P176,850) x 10% Total allowable deductions 2. C Professional fees Less: Allowable deductions Net income from business Add: Income from compensation: Allowance as director of Corporation A Commissions Net income before personal and additional exemptions D Net income before personal and additional exemptions Less: Personal and additional exemptions: Basic widower Additional exemptions (P25,000 x 3 qualified children) Net taxable income Tax on P140,000 Tax on excess (P55,835) x 30% Income tax due Problem 11 24 1. P164,200 Net worth, December 31, 2009 Less: Net worth, December 31, 2008 Unadjusted Net income for year 2009 Add back: Non-deductible expenses Contributions (P20,000 + P50,000) Total Less: Non-taxable income Income before contribution Less: Contributions: Deductible in full With limit Actual, P50,000 Limit, P268,000 x 10% = P26,800 Allowed Net income before personal exemptions Less: Personal exemptions (P50,000 +p100,000) Net taxable income 2. P140,000 Corrected net taxable income Less: Reported net income subject to tax Unreported taxable income

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P 12,000

Chapter 11: Income Tax of Individuals

P 96,000 11,000 7,890 1,960 60,000 P176,850 32,315 P209,165 P500,000 209,165 P290,835 P25,000 5,000 30,000 P320,835 P320,835 P 50,000 75,000 125,000 P195,835 P 22,500 13,959 P 36,459

3.

P375,000 325,000 P 50,000 150,000 70,000 P270,000 2,000 P268,000 P 20,000

26,800

46,800 P221,200 150,000 P 71,200 P 71,200 24,200 P 47,000

Problem 11 25 1. Itemized deduction Compensation income Gross income from business Less: Itemized deduction Total income before personal exemptions Less: Personal exemptions Basic personal exemptions Additional exemptions (P25,000 x 4) Taxable income Computation of income tax:

P 20,000 P 400,000 150,000 P 50,000 100,000 250,000 P270,000 150,000 P120,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

Tax on P70,000 Tax on excess (P50,000) x 20% Income tax before withholding tax Less: Withholding tax Income tax due and payable 2. Optional standard deduction Compensation income Gross income from business Less: Optional standard deduction (40%) Total income before personal exemptions Less: Personal exemptions Basic personal exemptions Additional exemptions (P8,000 x 4) Taxable income Computation of income tax: Tax on P70,000 Tax on excess (P40,000 x 20%) Income tax before withholding tax Less: Withholding Tax Income tax due and payable Problem 11 26 2010 net income from business Capital gains transactions Short term capital gains (P40,000 x 100%) Long term capital gains (P30,000 x 50%) Short term capital loss (P10,000 x 100%) Capital gains Less: 2009 Capital loss carry over limit Income before personal exemptions Basic personal exemption- married Additional exemption (P25,000 x 3) Taxable income, 2010

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P 8,500 10,000 P 18,500 1,000 P 17,500 P 20,000 P 400,000 160,000 P 50,000 100,000 240,000 P260,000 150,000 P110,000 P 8,500 8,000 P 16,500 1,000 P 15,500 P 600,000 P 40,000 15,000 (10,000) P45,000 35,000 P 50,000 75,000

Chapter 11: Income Tax of Individuals

10,000 P 610,000 125,000 P 485,000

Note: The applicable capital loss carry-over should only be limited to P35,000, because it should not exceed the net income from operation of such year (Sec. 39D, NIRC). Problem 11 27 1. Compensation income (P240,000 + P30,000) Less: Personal exemption (P50,000 + P25,000) Net taxable compensation Business income Less: Business expenses Net loss from business Net taxable income 2. Tax on P140,000 Tax on excess (P55,000 x 25%) Income tax due Less: Tax credit Income tax still due and payable

P270,000 75,000 P195,000 P100,000 120,000 (P20,000) 0 P195,000 P22,500 13,750 P36,250 30,000 P 6,250

Problem 11 28 1. Salary (P30,000 x 12) Add: Taxable 13th month pay (P35,000 P30,000) Total Less: SSS contribution Medicare/Philhealth contribution Taxable compensation income before personal exemption Less: Personal exemption Net taxable compensation income Estimated income tax due: Tax on P250,000 Tax on excess (P60,000 x 30%) Total income tax due per year Divided by number of months in a year Monthly withholding tax

P360,000 5,000 P365,000 P3,000 2,000 5,000 P360,000 50,000 P310,000 P50,000 18,000 P68,000 12 P 5,667

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Chapter 11: Income Tax of Individuals

2.

Quarterly business income tax Business income per quarter Less: Business expense per quarter Net income per quarter Tax on P70,000 Tax on excess (P10,000 x 20%) Quarterly business income tax first quarter to third quarter

P200,000 120,000 P 80,000 P 8,500 2,000 P 10,500

Problem 11 29 1. Entertainment fee (P1,700,000/85%) Business income Philippines Japan Net income before personal exemption Less: Personal exemption - basic Additional (P25,000 x 4) Net taxable income

P2,000,000 500,000 1,000,000 P3,500,000 P50,000 100,000 150,000 P3,350,000

Note: The OSD is not used because the problem is silent that the taxpayer opted to utilize it. OSD is allowed only if the taxpayer indicated in his return that he is using it otherwise he is using itemized deduction. If the taxpayer did not indicate that he is using OSD and at the same time he has no itemized deduction, he cannot deduct expenses from his gross business income. (Sec. 34 (L), NIRC) 2. Tax on P500,000 Tax on excess (P2,850,000 x 32%) Income tax due Tax credit Creditable withholding tax on fees (P2,000,000 x 15%) Business income tax paid - Philippines Japan (P1,037,000 x 1,000,000/3,500,000)) P296,286 vs. actual P300,000, lower Income tax still due (P1,037,000 P636,286)) P 125,000 912,000 P1,037,000

3.

P300,000 40,000 296,286 P 636,286 P 400,714

4.

Alternative Solution of Problem 11-29: If Rosanna Roces opted to use OSD 1. Entertainment fee (P1,700,000/85%) Business income Philippines Japan Total gross income Less: OSD (P3,500,000 x 40%) Net income before personal exemption Less: Personal exemption - basic Additional (P25,000 x 4) Net taxable income Tax on P500,000 Tax on excess (P1,450,000 x 32%) Income tax due Tax credit Creditable withholding tax on fees (P2,000,000 x 15%) Business income tax paid - Philippines Japan (P589,000 x 594,000*/2,100,000)) P166,603 vs. actual P300,000, lower Income tax still due (P589,000 P506,603) P2,000,000 500,000 1,000,000 P3,500,000 1,400,000 P2,100,000 P50,000 100,000 150,000 P1,950,000 P 125,000 464,000 P 589,000

2.

3.

P300,000 40,000 166,603 P 506,603 P 82,397

4.

Supporting computation of net taxable income before personal exemptions: Gross receipts Percent Allocated OSD x percent Within 2,500,000 71% 994,000 Outside 1,000,000 29% 406,000 Total 3,500,000 100% 1,400,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

Net income before personal exemption Problem 11 30 Gross professional income (P100,000/90%) Rent income (P300,000/2) Gross compensation income Total Less: Personal exemptions Net taxable income Tax on P250,000 Tax on excess: Mr. Bravo (P86,111 x 30%) Mrs. Bravo (P150,000 x 30%) Income tax due Withholding tax on compensation Withholding tax on professional income (P111,111 P100,000) Income tax still due and payable Mr. Bravo P111,111 150,000 225,000 P486,111 150,000 P336,111 P 50,000 25,833 . 75,833 25,000) 11,111) 39,722 1,506,000 594,000

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2,100,000

Chapter 11: Income Tax of Individuals

Mrs. Bravo P150,000 300,000 P450,000 50,000 P400,000 P 50,000 45,000 P 95,000 ( 50,000) . P 45,000

P ( ( P

Note: No OSD is allowed because the taxpayer did not opt to use it in lieu of itemized deduction. (Sec. 34 (L), NIRC) Alternative Solution of Prob. 11-30: If taxpayers opted to use OSD Gross professional income (P100,000/90%) Rent income (P300,000/2) Total gross income Less: OSD (40%) Net income from business Add: Gross compensation income Total Less: Personal exemptions Net taxable income Tax on P140,000/ P250,000 Tax on excess: Mr. Bravo (P91,667 x 25%) Mrs. Bravo (P90,000 x 30%) Income tax due Withholding tax on compensation Withholding tax on professional income (P111,111 P100,000) Income tax still due and payable Mr. Bravo P111,111 150,000 P261,111 104,444 P156,667 225,000 P381,667 150,000 P231,667 P 22,500 22,917 . 45,417 25,000) 11,111) 9,306 Mrs. Bravo P150,000 P150,000 60,000 P 90,000 300,000 P390,000 50,000 P340,000 P 50,000 27,000 P 77,000 ( 50,000) . P 27,000

P ( ( P

Problem 11 31 1. P290,000 Compensation income Taxable 13th month pay and bonuses (P40,000 P30,000) Net business income (P400,000 P300,000) Capital gains long-term (P60,000 x 50%) Total Less: Personal exemptions (P50,000 + P100,000) Net taxable income 2. (P8,000) Tax on P250,000 Tax on excess (P40,000 x 30%) Total income tax due Less: Income tax paid on: Compensation Quarterly business income Income tax refund

P300,000 10,000 100,000 30,000 P440,000 150,000 P290,000

P P P 50,000 20,000 (P

50,000 12,000 62,000 70,000 8,000)

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

Problem 11 32 Gross income from business (P1,000,000 P700,000) Operating expenses (P250,000 P60,000 P30,000) Deductible interest expense (P30,000) (P20,000 x 12/32) Deductible contribution (P300,000 P160,000 P22,500) x 10% Net business income Capital asset transactions: Capital gains short-term (P300,000 x 100%) Capital losses long-term (P400,000 x 50%) Lotto winning, USA Gambling winnings Gambling losses (excess cannot be deducted from other income) Gross compensation income (P180,000 + P20,000) Taxable 13th month pay (P35,000 P30,000) Net taxable income before exemption Less: Personal exemptions (P50,000 + P100,000) Net taxable income Tax on P500,000 Tax on excess (P60,750 x 32%) Total income tax due Less: Withholding tax on compensation Income tax still due and payable Problem 11 33 1. 13th month pay Other benefits: Excess of clothing allowance (P4,500 P4,000) Excess of rice subsidy (P1,600 P1,500) x 12 Total (not exceeding P30,000) nontaxable Allowable de minimis: Clothing allowance Rice subsidy (P1,500 x 12) Total 13th month pay and other benefits 2. Basic salary (P25,000 x 12) Less: Personal exemptions Net taxable compensation income Tax on P140,000 Tax on excess (P10,000 x 25%) Total income tax due Withholding tax from January to November 2009 (P25,000/12) x 11 3. P ( ( ( P P 300,000 200,000 P 200,000 250,000

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Chapter 11: Income Tax of Individuals

300,000 160,000) 22,500) 11,750) 105,750 100,000 300,000

200,000 5,000 P 710,750 150,000 P 560,750 P 125,000 19,440 P 144,440 20,000 P 124,440

P25,000 P 500 1,200 P4,000 18,000 1,700 P26,700 22,000 P48,700 P300,000 150,000 P150,000 P22,500 2,500 P25,000 P22,917

Net taxable compensation income P150,000 Add: Net business income: Professional fees (P224,000/1.12) P 200,000 Gross income from sales (P5,000,000 P3,200,000) 1,800,000 Less: Itemized deductions: P2,000,000 Operating expenses, net of interest expense (P900,000 P50,000) P850,000 Interest expense (P50,000 (P75,000 x 38%) 21,500 871,500 Net income before contribution P1,128,500 Less: Contribution, actual = P100,000, lower Contribution, limit (P1,128,500 x 10%)= P112,850 100,000 1,028,500 Net taxable income P1,178,500 Tax on P500,000 Tax on excess (P678,500 x 32%) Total income tax due Less: Tax credits: WTW from Jan to Nov., 2009 WT on Professional income (P224,000 P200,000) Income tax still due and payable on December 31, 2009 P125,000 217,120 P342,120 P22,917 24,000 46,917 P295,203

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

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Chapter 11: Income Tax of Individuals

Problem 11 34 Note: OSD is not applicable unless the taxpayer signified in his ITR that he opted to use OSD in lieu of itemized deductions. (Sec. 34 (L), NIRC)

Taxpayer is a resident citizen a. Normal (tabular) tax:

Salaries: Within (P180,000/90%) Without ($2,250/90%) x P50 Commissions: Within (P57,000/ 95%) Without ($950/ 95%) x P50 Interest income-without ($1,200/80%) x P50 Dividend-without ($1,800/90%) x P50 Totals Less: Personal exemption basic Taxable income
Tax on P500,000 Tax on excess (P60,000) x 32% Total Less: Tax credits: Compensation (P200,000 x 10%) Commission (P60,000 x 5%) Allowable tax credit - foreign* Income tax due and payable, after tax credits

Philippines P200,000 60,000

U. S. A. P125,000 50,000 75,000

Total P325,000 110,000 75,000 100,000 P610,000 50,000 P560,000

. P260,000

100,000 P350,000

P125,000 19,200 P144,200 P20,000 3,000 40,000

63,000 P 81,200

*Allowable tax credit paid outside the Philippines is lower than tax limit or actual tax paid. The tax credit is computed as follows:
Limit (P350,000/P610,000) x P144,200 Actual foreign taxes paid: Interest (P75,000 x 20%) Compensation (P125,000 x 10%) Dividend (P100,000 x 10%) Commissions (P50,000 x 5%) Total Allowable foreign tax credit - lower P82,738 P15,000 12,500 10,000 2,500 P40,000 P40,000

Note: The actual tax paid outside the Philippines is lower than the computed tax limit; hence, the actual tax paid without is the allowable tax credit.

b. Passive income tax:

Interest income within (P50,000/ 80%) x 20% Dividend income within (P9,000/ 90%) x 10% Total passive income tax for the year P12,500 1,000 P13,500

Note: Philippine Lotto winnings are tax-exempt.

Taxpayer is a nonresident citizen a. Normal (tabular) tax:

Salaries - within (P180,000/90%) Commissions- within (P57,000/ 95%) Net income Less: Personal exemption - basic Taxable income
Tax on P140,000 Tax on excess (P70,000) x 25% Total tax due Less: Withholding taxes within (P20,000 + P3,000) Income tax due and payable

P200,000 60,000 P260,000 50,000 P210,000

P22,500 17,500 P40,000 23,000 P17,000 P12,500 1,000 P13,500

b. Passive income tax:

Interest income within (P50,000/80%) x 20% Dividend income within (P9,000/90%) x 10% Total passive income tax for the year

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

Note: Nonresident citizens are taxable only on income derived within the Philippines.

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Chapter 11: Income Tax of Individuals

Taxpayer is a resident alien. Solution is the same as nonresident citizen. Taxpayer is a nonresident alien engaged in trade or business in the Philippines. The taxpayer cannot be regarded as doing business in the Philippines because he has no business income in the Philippines. If the taxpayer has stayed more than 180 days in the Philippines, he is regarded as doing business. The computation of his net income tax payable in the Philippines will be the same as in number 2 under the assumption that his country is granting the same privilege of reciprocity to nonresident Filipino doing business in that foreign country. Taxpayer is a nonresident alien not engaged in trade or business in the Philippines. Nonresident aliens are subject to tax of 25% based on their gross income derived within the Philippines. In our illustration, let us assume that the source of income has been deducted with 25% tax on the income given to the taxpayer - that is, the amount shown in the problem is net of 25% final tax. The income tax of Mr. Ramsay Colorado would be:
Salaries- within (P180,000/75%) Commissions- within (P57,000/ 75%) Interest income within (P50,000/ 75%) Dividend income within (P9,000/ 75%) Gross income within Multiplied by tax rate Income tax for the taxable year within P240,000 76,000 66,667 12,000 P394,667 25% P 98,667

Note: In computing the income tax, a fractional part of a peso less than P0.50 shall be disregarded. If the fractional part is P0.50 or more, its shall be rounded up to P1.00 (R.A. 590).