TAXATION OF INDIVIDUALS

Classification of Individual Taxpayers

For Income tax purposes, individual taxpayers are classified as follows:
1. Resident Citizen – An individual whose residence is within the Philippines and who is a citizen thereof.
2. Non-Resident Citizen – is a citizen who:
A. establishes to the satisfaction of the Commissioner the fact of his physical presence abroad, with a
definite intention to reside therein,
B. Leaves the Philippines during the taxable year to reside abroad either as an immigrant or for
employment on a permanent basis,
C. Works and derives income from abroad and whose employment thereat requires him to be
physically present abroad most of the time (not less than 183 days) during the taxable year.

A citizen who has been previously considered as non-resident citizen and who arrives in the Philippines
at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a
nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived
from sources abroad until the date of his arrival in the Philippines.

3. Resident alien – means any individual whose residence is within the Philippines and who is not a citizen
thereof.

4. Nonresident alien – means an individual whose residence is not within the Philippines and who is not a citizen
thereof. A nonresident alien is classified into:
A. Engaged in Trade or Business in the Philippines (ETB) – refers to a nonresident alien who shall come
to the Philippines and stay for an aggregate period of more than 180 days during any calendar year,
or,
B. Not Engaged in Trade or Business in the Philippines (NETB) – refers to a nonresident alien who shall
come to the Philippines and stay for an aggregate period of 180 days or less during any calendar year.

General Principles of Income Taxation on Individuals

1. A resident citizen is taxable on income derived from sources within and without the Philippine.
2. A nonresident citizen is taxable only on income derived from sources within the Philippines.
3. A citizen of the Philippines who is working and derived income from abroad as an overseas contract worker
is taxable only on income from sources within the Philippines.
4. An alien individual whether a resident or not in the Philippines is taxable only on income derived from
sources within the Philippines.

The following table summarizes the situs of taxable income of individual taxpayer:

Individual Taxpayer Income Within Income Without

1. Resident Citizen Taxable Taxable
2. Resident Alien Taxable Not Taxable
3. Nonresident Citizen Taxable Not Taxable
4. Nonresident Alien ETB Taxable Not Taxable
5. Nonresident Alien NETB Taxable Not Taxable

Tax on Income Earnings and Money Remittances of Overseas Contract Workers (OCW) / Overseas Filipino
Workers (OFW)
OCW refers to Filipino citizens employed in foreign countries, commonly referred to as OFWs who are
physically present in foreign country as a consequence of their employment thereat.
Their salaries and wages are paid by an employer abroad and is not borne by any entity or person in the
Philippines. To be considered as an OCW or OFW, they must be truly registered as such in the Philippine
Overseas Employment Administration (POEA) with a valid Overseas Employment Certificate (OEC).
Seafarers or seamen are Filipino citizens who receive compensation for services rendered abroad as
member of the complement of a vessel engaged exclusively in international trade.
To be considered as an OCW or OFW they must be duly registered as such with the POEA and with valid
Overseas Employment Certificate (OEC) with a valid Seafarers Identification Record Book (SIFB) or Seaman’s
Book issued by the Maritime Industry Authority (MARINA).
 An OCW is taxable only on income from sources within the Philippines. Thus, OCW or OFWs income
rising out of his employment is exempt from income tax.
If an OCW or OFW has income earnings from business activities or properties within the Philippines ,
such income earnings are subject to regular income tax.
However, it shall be exempt from 15% final tax on interest income from a depository bank under the
expanded foreign currency deposit system upon presentation of proof of non-residency such as OEC or
Seaman’s Book.
If an account is in the name of the OCW or a Filipino seaman, and an individual (spouse or dependent)
who is living in the Philippines, 50% of the interest income from such bank deposit will be treated as exempt
while the other 50% shall be subject to a final withholding tax of 15%.

Kinds of Income of Individual Taxpayer

1. Compensation Income – means all remuneration for services performed by an employee under the
employer-employee relationship.
= such as salaries, wages, emoluments and honoraria, allowances, commissions, fees, taxable bonuses
and fringe benefits
2. Business Income – earned by a sole proprietor or an independent contractor who reports income earned
from self-employment.
= it includes those hired under a contract of service or job order.
3. Professional Income –earned by professionals whose income is derived purely from the practice of
profession and not under the employer-employee
4. Passive Income – income earned without working actively, they are subject to different final withholding
tax rates.

PASSIVE INCOME
Passive incomes are incomes subject to final withholding tax and shall not be included in the gross
income of the taxpayer. The liability for payment of the tax rests primarily on the payor as a withholding agent.
The payee is not required to file an income tax return for the particular income.

EXAMPLES
A. Income payments to an individual subject to final taxes

Resident or Citizen
1. Interest from any currency bank deposit 20%
2. Royalties 20%
3. Royalty on books and other literary works, musical compositions 10%
4. Winnings (in raffles) 20%
5. PCSO and LOTTO winnings (P 10,000 or less) Not taxable
6. PCSO and LOTTO winnings (more than P 10,000) 20%
7. Dividend from domestic corporation 10%

NCOME TAX RATES – Effective 2023-onwards: (TRAIN LAW)

Over Not Over Tax Plus of Excess Over

250,000 0%
250,000 400,000 15% - 250,000
400,000 800,000 22,500 20% 400,000
800,000 2,000,000 102,500 25% 800,000
2,000,000 8,000,000 402,500 30% 2,000,000
8,000,000 , 2,202,500 35% 8,000,000

For Married individuals, the husband and wife shall compute separately their income tax based on their
respective total taxable income.
Provided, that if any income cannot be definitely attributed to or identified as income exclusively earned
or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of
determining their respective taxable income.
ILLUSTRATION 1:
Ana, married, supporting her mother and 2 minor children, has the following income and expenses:
Salary 80,000
Allowances 6,000
Professional Income as CPA 25,000
Gross income from business 200,000
Expenses – practice of profession 5,600
Expenses – Business 130,000
REQUIRED: Compute for the income tax due using the graduated rates of tax.

ANSWER:
Salary 80,000
Allowances 6,000
Professional Income as CPA 25,000
Gross income from business 200,000
TOTAL 311,000
Less: Deductions
Expenses – practice of profession 5,600
Expenses – Business 130,000 135,600
Taxable Income 175,400 below P 250,000 exempt
=======
Tax on P 175,400 = Exempt
ILLUSTRATION 2:
Bernard, single, supporting his brother who is 30 years old and mentally defective had the following data
in 2018:
Income from profession 450,000
Interest on bank deposit (net of 20% final tax) 4,000
Winnings in a raffle 100,000
Prize won in a contest 5,000
Dividend from C Corp., a domestic corporation 6,000
Salary as part-time teacher (net of SSS contribution
and P 2,400 creditable withholding tax) 17,600
Rental income, net of creditable W/tax of 5% 38,000
Expenses incurred (Rental) 60,000
REQUIRED: Compute the following:
1. Income tax payable based on the graduated income tax rates.
2. Final withholding taxes on the passive incomes

ANSWER:
1.
Income from profession 450,000
Prize won in a contest 5,000
Salary (P17,600 + 2,400) 20,000
Rental income (38,000 / 95%) 40,000
Gross Income 515,000
Expenses incurred 60,000
Taxable Income 455,000
455,000 =======
Tax of (400,000) = 22,500
55,000 x 20% = 11,000
 Income tax due = 33,500
Less: Tax credit
W/tax on salary = 2,400
W/tax on rent 2,000 4,400
Income tax payable = 29,100
======

2. Final taxes on passive income

a) Interest on bank deposit (4,000 / 80%) = 5,000
Rate of tax 20%
Final withholding tax = 1,000

b) Winnings in a raffle = 100,000

Rate of tax 20%_
Final withholding tax = 20,000

c) Dividend from C Corp. = 6,000

Rate of tax 10%_
Final withholding tax = 600
Notes:
1. Interest on bank deposit, winnings in raffle and dividends from domestic company are passive
incomes. Do not form part of taxable income.
2. Prizes amounting to P 10,000 or less are not subject to final tax.
3. Compensation and business income must be declared at gross of creditable withholding tax.
4. Salaries and rent income are subject to withholding tax. The amount of taxes previously withheld
shall be credited from the income tax due because these are considered as advance payments of
their tax liability.

Allowable deductions from income of Individual Taxpayers

The deductions allowed shall depend on the nature of income earned by the taxpayer, as follows:
1. Compensation income and Passive income – no deductions are allowed
2. Business / Professional – either itemized deductions or optional standard deductions

ILLUSTRATION 3:
Pepe and Pilar, husband and wife, with 5 qualified dependent children had the following income in
2023: Compensation income:
Pepe (gross of w./tax of 13,500) 242,000
Pilar (net of withholding tax of P 10,000) 130,000
Gross income on conjugal property of spouses 260,000
Expenses on conjugal property 30,000

The spouses are paying a total insurance premium of P 300 a month to X Insurance Co. on the
hospitalization insurance of the members of the family.

REQUIRED: Compute following:

1. Income tax payable/overpayment by each spouse.
2. Aggregate amount payable/overpayment of the spouses.
 ANSWER:
1) Income tax payable by Pepe
Gross compensation income 242,000
Share in net conjugal property (260,000 / 2) = 130,000
Less: Share in conjugal expense (30,000 / 2) 15,000 115,000
Taxable income 357,000
357,000
Tax on P 250,000 Exempt
107,000 x 15% 16,050
Less: W/tax 3,500
Income Tax payable 12,550

2) Income tax payable by Pilar

Gross compensation income (130,000 + 10,000) 140,000
Share in net conjugal property 115,000
Taxable income 255,000

255,000
Tax on P 250,000 Exempt
5,000 x 1 5 % = 750
Less: W/tax 10,000
Overpayment (9,250)

3) Aggregate amount payable/overpayment by the

spouses
Income tax payable on Pepe 12,550
Excess tax withheld on Pilar (9,250)
Income tax payable of the spouses = 3,300

Notes:
1) The insurance premium is not deductible.
2) Income from conjugal property of spouses is to be divided equally between the spouses.

OPTIONAL STANDARD DEDUCTION (OSD)

In lieu of itemized deductions, an individual taxpayer (except a nonresident alien) may elect a standard
deduction in an amount not exceeding 40% of his gross sales or receipts. However, the following conditions
must be satisfied:
A) That he signified his intention to elect optional standard deduction by checking the appropriate
box in the income tax return filed for the first quarter or the initial quarter of the taxable year
after the commencement of a new business/practice of profession.
B) Once the election is made, it must be consistently applied to all the succeeding quarterly returns
and in the final income tax return for the taxable year.

The purpose of the optional standard deduction is to facilitate the audit or review of tax returns
because there is no need on the part of the administrative taxing personnel to determine which items
are allowed to be deducted or not.
Under a different method of accounting
If the individual is on the accrual basis of accounting for income and deductions, the optional
standard deduction shall be based on the gross sales during the taxable year.
 On the other hand, if the individual employs the cash basis accounting for his income and
deductions, the optional standard deduction shall be based on gross receipts during the taxable year.

For other individual taxpayers allowed by law to report their income and deductions other than the
cash and accrual method of accounting the gross sales or gross receipts shall be determined in
accordance with the acceptable method of accounting.

ILLUSTRATION 4:
Juan Castro, married with (5) dependent children, had the following income and expenses during the
year:
Income:
Salary from Manding Pural Company P200,000
Gross receipts from business (Cost of sales, P450,000) 950,000
Gross receipts from profession 150,000
Gain on sale of capital asset 30,000

Joint expenses/Losses:
Salaries of employees 500,000
Rent of office space 24,000
Depreciation of office and store equipment 30,000
Taxes and licenses 10,000
Bad debts 7,500
Light and water 18,000
Loss on sale of capital asset 20,000

REQUIRED: Compute the income tax due assuming Castro availed of:
1. Itemized deduction
2. Optional standard deduction
3. Given the above data, which option should Jun Castro choose –
the itemized deduction or the optional deduction?
Answer:

1. Taxpayer availed of itemized deduction.

Salary P200,000
Add: Self-employment income
Gross receipts- business P950,000
Less: Cost of sales 450,000 P500,000
Gross receipts-profession 150,000
Net capital gain:
Capital gain 30,000
Capital loss (20,000) 10,000 660,000
Total 860,000
Less: Itemized deductions
Salaries 500,000
Rent expense 24,000
Depreciation 30,000
Taxes and licenses 10,000
Bad debts 7,500
Light and water 18,000 589,500
Taxable income 270,500
 Tax on P250,000 Exempt
20,500 x 15% P 3,075

2. Taxpayer availed of optional standard deduction

Salary P200,000
Self-employment income:
Gross receipts – business P 950,000
Gross receipts – profession 150,000
Total 1,100,000
Less: Optional standard deduction
(1,100,000 x 40%) 440,000 660,000
Other income – net capital gain 10,000
Taxable income 870,000

Tax on P800,000 P 102,500

70,000 x 25% 17,500
Income tax 120,000
Since deductions are not allowed on compensation income, the 40% should be based only on the Self -
employment income.

3. Jun Castro should avail of the itemized deductions because he will pay lesser income
tax. If he avails himself of itemized deductions, the tax liability will be P3,075 instead
of P120,000.
GROUP ACTIVITY

PROBLEM 1. MR. ROGER PRESENTED THE FOLLOWING SCHEDULE OF INCOME IN 2023:

SERVICE FEES, NET OF 5% WITHHOLDING TAX 617,500
DIVIDENDS FROM A DOMESTIC CORPORATION 20,000
INTEREST INCOME FROM BANK 10,000

EXPENSES:
• OFFICE UTILITIES 30,000
• STAFF SALARIES 120,000
• RENT AND MISCELLANEOUS EXPENSES 80,000
• TUITION FEES OF 5 DEPENDENT CHILDREN 100,000
• PERSONAL MEDICAL EXPENSES 15,000

NET BUSINESS INCOME 297,500

REQUIRED:
A. TOTAL DEDUCTIBLE EXPENSES AGAINST GROSS INCOME
B. COMPUTE ROGER’S TAXABLE NET INCOME
C. COMPUTE THE TAX STILL DUE USING GRADUATED TAX TABLE.
D. COMPUTE THE TAX STILL DUE IF MR. ROGER OPTED TO THE 8% OPTIONAL TAX

PROBLEM 2: MIYA, A SELF-EMPLOYED EMPLOYEE WITH TEN DEPENDENT CHILDREN, HAD THE
FOLLOWING ITEMS OF INCOME AND EXPENSES IN 2023:

SALES 900,000
LESS: COST OF SALES 400,000
GROSS PROFIT 500,000
INTEREST INCOME, NET OF 20% FINAL TAX 16,000
EXPENSES:
• SALARIES EXPENSE 100,000
• DEPRECIATION EXPENSE 15,000
• RENT & OTHER EXPENSES 50,000
• INTEREST EXPENSE 30,000
NET INCOME 333,000

REQUIRED:
A. TOTAL DEDUCTIBLE EXPENSES AGAINST GROSS INCOME.
B. COMPUTE MIYA’S TAXABLE NET INCOME.
C. FROM REQ B, COMPUTE THE TAX STILL DUE USING GRADUATED TAX TABLE.
D. COMPUTE MIYA’S TAXABLE NET INCOME IF SHE OPTED OSD.
E. FROM REQ D, COMPUTE THE TAX STILL DUE USING GRADUATED TAX TABLE.
F. COMPUTE THE TAX STILL DUE IF MR. MIYA OPTED TO THE 8% OPTIONAL TAX.