69 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) Chapter 11: Income Tax of Individuals CHAPTER 11 INCOME TAX OF INDIVIDUALS Problem 11 – TRUE OR FALSE False – Qualified dependent parents and siblings are not entitled for additional exemption False – must be more than 180 days False – NRA NBT are not allowed for personal exemptions True True True True True True 10 True 11 False – No personal exemption is allowed to NRANEBT 12 True Problem 11 – TRUE OR FALSE False – additional exemptions are allowed only for qualified dependent children 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 True False – 15% of gross income False – creditable withholding income tax False – qualified dependent parent and siblings are not entitled for additional exemption False – Tax credit of income taxes paid outside the Philippines is allowed only for resident Filipino citizen False – The creditable withholding tax is 15% False – Gross income includes other income but not compensation income 10 False – Tax-exempt 11 True 12 True Problem 11 – D D A A A B D C C 10 B Problem 11 – D B C A B D B B B 10 A Problem 11 – Not in the choices P25,000 per child (R.A 9504) Not in the choices P50,000 basic (R.A 9504) B C B B A, B & C D D D 10 C Problem 11 – A Income from the Philippines (P10,000 x 12) Less: Personal exemption – single Income subject to tax in the Philippines P120,000 50,000 P 70,000 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 – C Gross compensation income – Philippines (P250,000 x 12) Multiplied by special income tax rate Income tax payable Problem 11 – A Basic personal exemption of couple: Husband Wife Additional exemptions: qualified dependent children (P25,000 x 4) Maximum amount of personal exemption P3,000,000 15% P 450,000 P50,000 50,000 100,000 P200,000 70 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) Chapter 11: Income Tax of Individuals Problem 11 – C Only P50,000 basic personal exemption because the taxpayer’s category is single Problem 11 – 10 B Basic personal exemption – Married Additional exemption Total personal exemptions P50,000 25,000 P75,000 Problem 11 – 11 C Basic personal exemption Additional exemption (a & b only) (P25,000 x 2) Total personal and additional exemptions 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 citizen’s income does not exceed P60,000 during the year The tax withheld from interest income is final tax Problem 11 – 17 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 Subject to Tabular tax P240,000 500,000 60,000 40,000 P840,000 ( 50,000) P790,000 Interest income within Dividend income within Income subject to 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 Final tax P100,000 60,000 P160,000 P240,000 300,000 P540,000 50,000 P490,000 Interest income within Dividend income within Income subject to final tax P100,000 60,000 P160,000 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 A Subject to Tabular tax Final tax 71 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) Chapter 11: Income Tax of Individuals Compensation income Business and other income: 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 P240,000 500,000 60,000 40,000 P600,000 ( 240,000) P360,000 P600,000 ( 50,000) P550,000 Interest income within Dividend income within Income subject to final tax 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 P100,000 60,000 P160,000 P240,000 180,000 P420,000 50,000 P370,000 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 P100,000 60,000 P160,000 Husband P140,000 P 22,500 20,000 P 2,500 Problem 11 – 19 D Compensation as researcher Less: Personal exemption – married Net taxable compensation income Wife P250,000 P 50,000 45,000 P 5,000 P 600,000 50,000 P 550,000 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 P125,000 16,000 P141,000 12,000 37,500 P190,500 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 P 4,000 120,000 P124,000 Problem 11 – 21 B 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 P 1,250 3,000 30,000 P34,250 Not in the choices None All reported earnings are subject to final tax 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 100% 12% 112% 20% 92% P 92,000 92% P100,000 72 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) Chapter 11: Income Tax of Individuals Withholding tax (P100,000 x 20%) P 20,000 VAT (P100,000 x 12%) P 12,000 Problem 11 – 23 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 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 qualified children) Net taxable income 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 P320,835 P 50,000 75,000 Tax on P140,000 Tax on excess (P55,835) x 30% Income tax due Problem 11 – 24 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 125,000 P195,835 P 22,500 13,959 P 36,459 P375,000 325,000 P 50,000 150,000 70,000 P270,000 2,000 P268,000 P 20,000 26,800 P140,000 Corrected net taxable income Less: Reported net income subject to tax Unreported taxable income Problem 11 – 25 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 30,000 P320,835 46,800 P221,200 150,000 P 71,200 P 71,200 24,200 P 47,000 P 20,000 P 400,000 150,000 P 50,000 100,000 250,000 P270,000 150,000 P120,000 73 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) Chapter 11: Income Tax of Individuals Computation of income tax: Tax on P70,000 Tax on excess (P50,000) x 20% Income tax before withholding tax Less: Withholding tax Income tax due and payable 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 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 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 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 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 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 P270,000 75,000 P195,000 P100,000 120,000 (P20,000) Tax on P140,000 Tax on excess (P55,000 x 25%) Income tax due Less: Tax credit Income tax still due and payable Problem 11 – 28 Salary (P30,000 x 12) Add: Taxable 13 th 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%) P195,000 P22,500 13,750 P36,250 30,000 P 6,250 P360,000 5,000 P365,000 P3,000 2,000 5,000 P360,000 50,000 P310,000 P50,000 18,000 74 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) Chapter 11: Income Tax of Individuals Total income tax due per year Divided by number of months in a year Monthly withholding tax P68,000 12 P 5,667 Quarterly business income tax Business income per quarter Less: Business expense per quarter Net income per quarter P200,000 120,000 P 80,000 Tax on P70,000 Tax on excess (P10,000 x 20%) Quarterly business income tax first quarter to third quarter Problem 11 – 29 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 P 8,500 2,000 P 10,500 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) 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 P 125,000 912,000 P1,037,000 P300,000 40,000 296,286 Income tax still due (P1,037,000 – P636,286)) P 636,286 P 400,714 Alternative Solution of Problem 11-29: If Rosanna Roces opted to use OSD 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 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 P300,000 40,000 166,60 Income tax still due (P589,000 – P506,603) P 506,603 P 82,397 Supporting computation of net taxable income before personal exemptions: Within Outside Total 75 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) Chapter 11: Income Tax of Individuals Gross receipts Percent 2,500,000 71% 1,000,000 29% 3,500,000 100% Allocated OSD x percent Net income before personal exemption 994,000 1,506,000 406,000 594,000 1,400,000 2,100,000 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 Mrs Bravo P 50,000 P 50,000 25,833 P 75,833 ( 25,000) ( 11,111) P 39,722 45,000 P 95,000 ( 50,000) P 45,000 P150,000 300,000 P450,000 50,000 P400,000 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 Mr Bravo Gross professional income (P100,000/90%) P111,111 Rent income (P300,000/2) 150,000 Total gross income P261,111 Less: OSD (40%) 104,444 Net income from business P156,667 Add: Gross compensation income 225,000 Total P381,667 Less: Personal exemptions 150,000 Net taxable income P231,667 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 P150,000 P150,000 60,000 P 90,000 300,000 P390,000 50,000 P340,000 P 22,500 P 50,000 22,917 P 45,417 ( 25,000) ( 11,111) P 9,306 27,000 P 77,000 ( 50,000) P 27,000 Problem 11 – 31 P290,000 Compensation income Taxable 13 th 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 (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 Mrs Bravo P300,000 10,000 100,000 30,000 P440,000 150,000 P290,000 P P 50,000 12,000 62,000 (P 70,000 8,000) P 50,000 20,000 76 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) Chapter 11: Income Tax of Individuals 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 13 th month pay (P35,000 – P30,000) Net taxable income before exemption Less: Personal exemptions (P50,000 + P100,000) Net taxable income P 300,000 ( 160,000) ( 22,500) ( 11,750) P 105,750 P 300,000 200,000 P 200,000 250,000 200,000 5,000 P 710,750 150,000 P 560,750 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 13 th 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 13 th month pay and other benefits 100,000 300,000 P 125,000 19,440 P 144,440 20,000 P 124,440 P25,000 P 500 1,200 P4,000 18,000 Basic salary (P25,000 x 12) Less: Personal exemptions Net taxable compensation income 1,700 P26,700 22,000 P48,700 P300,000 150,000 P150,000 Tax on P140,000 Tax on excess (P10,000 x 25%) Total income tax due P22,500 2,500 P25,000 Withholding tax from January to November 2009 (P25,000/12) x 11 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 21,500 871,500 38%) 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 77 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) 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 Philippines P200,000 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 U S A Total P125,000 P325,000 50,000 75,000 110,000 75,000 100,000 P350,000 100,000 P610,000 50,000 P560,000 60,000 P260,000 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 P82,738 Allowable foreign tax credit - lower P40,000 P15,000 12,500 10,000 2,500 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 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 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) 78 Chapter 11: Income Tax of Individuals Note: Nonresident citizens are taxable only on income derived within the Philippines 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 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)  ... (BY: VALENCIA & ROXAS) Chapter 11: Income Tax of Individuals Computation of income tax: Tax on P70,000 Tax on excess (P50,000) x 20% Income tax before withholding tax Less: Withholding tax Income. .. (P86 ,111 x 30%) Mrs Bravo (P150,000 x 30%) Income tax due Withholding tax on compensation Withholding tax on professional income (P 111, 111 – P100,000) Income tax still due and payable Mr Bravo P 111, 111. .. 18,000 74 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) Chapter 11: Income Tax of Individuals Total income tax due per year Divided by number of months in a year Monthly withholding tax P68,000