Income taxation by ampongan chapter 5 to 7

ANSWER: C Letter A refers to “deductions from gross income.” Letter B refers to “tax exemption.” Letter D refers to “tax credit.” Exclusion refers to income received or earned but is no

No It does not matter whether the insured is the mother or the wife ofthe beneficiary The exclusion exists because life insurance benefitsclosely resemble inheritances which are not taxable.

3 None, because Angel is not required to pay income tax on the entireamount he received as proceeds from insurance policy The reason beingthat the insured did not outlive the policy

If however, his father outlived the life insurance policy, Angel mustreport an income of P75,000 (the face amount of P100,000 minus thepremiums paid in the amount of P25,000)

4 Rodolfo must report an income of P75,000

Although acquired by him, he is not required to report the value ofthe inherited properties in his income tax return because propertiesacquired thru inheritance are subject to estate tax; the liability being onthe estate and not on the recipient of the estate

d Taxable Salaries received by employees who are unable to work due topersonal injuries or sickness are taxable It does not make any differencebetween receiving the salary while he is working and receiving the sameeven while the employee is unable to work

e Not taxable The P60,000 is in the form of moral damages which is notcapable of pecuniary estimation Besides, it is in the nature of a return ofcapital

6 6 No, because all the requisites for exemption from income tax are

present: (1) Tanda retired at age 60 which is more than the required age

of 50 years; (2) a private pension plan is maintained by the employer;and, (3) he worked with San Jose Corporation for more than 10 years.The law does not require continuous service Therefore, the 10-yearservice requirement is satisfied even if he had a broken service with thecompany

7 The amount is taxable to Nilo Separation pay is exempt from incometax if the cause of separation from service is death, sickness, physicaldisability, or any cause beyond the control of the employee

None of the above-mentioned can be pointed out as the very cause

of his separation from service Inefficiency in service due to frequenttardiness caused by heavy traffic is not beyond the control of theemployee

on their favorite fighter and not to promote sports

10 Answer: P38,000

00Add: Benefits

Christmas bonus 20,000

Productivity bonus 2,000

2 ANSWER: B

0Less: Premiums paid (1,000 x 12 x 20) 240,00

Proceeds of insurance 500,0

00Less: Premiums paid (P10,000 x

Prob 5-2.4:

ANSWER: B

Proceeds of life insurance policy

Less: Amounts of premiums paid

Amount subject to tax

P500,00

0400,00

0100,00

control, that is resignation; while the cessation from employment of Mr.Kintanar was made without his control

Therefore, the separation pay received by Mr Jacobo is a taxableincome while the amount received by Mr Kintanar is not taxable

Prob 5-3.2

ANSWER: C

The retirement benefit of P300,000 is taxable to Jovito because heretired at the age of 48 To be exempt from the payment of incometax, the taxpayer must be at least 50 years on the date of hisretirement

In the case of the proceeds from insurance policy, the amountexempt is P40,000 (P2,000 x 20) only which represents the return ofthe premiums paid

The amount of P250,000 is taxable because Remus is only 49years old upon retirement To be exempt from income tax, theretirement age of an employee must be at least 50 years

Prob 5-3.6

ANSWER: D

The separation pay received by Evelyn is taxable because of thevoluntary action on her part To be exempt, the causes for separationmust be either death, sickness, physical disability, or any causebeyond the control of the employee

The separation pay received by Ling-ling and Gina are exemptbecause they are separated from service due to redundancy anddisability, causes which are beyond their control

Prob 5-4.2

ANSWER: A

00Increase in value of car (P600,000 -

The proceeds of life insurance policies paid to the beneficiary, in thiscase the wife, upon the death of the insured is excluded from gross income

EXERCISES 5–5

EXERCISE 5–

a The P350,000 value of the car is subject to a final tax of 20%.

b The P5,000 is subject to graduated tax to be reported in the income tax return

c The cash prize and the equivalent amount of the 100 shares are subject

to 20% final tax because the awards given are not in recognition ofreligious, charitable, scientific, educational, artistic, literary or civicachievement

b The talent fees derived from Inter-Island Broadcasting Networkamounting to P100,000 is a professional income subject to graduatedrates of tax

c The $5,000 value of the trophy is not taxable to her because it is inrecognition of an outstanding achievement An award for outstandingachievement is a gift, and not a taxable income

PROBLEM 5-6.1

ANSWER: D

Salary (P25,000 x 12) 300,0

00Other benefits:

Only option D has complied with the requisites for exemption from tax

of retirement benefits, viz: (1) There must be a private pensionmaintained by the employer and approved by the BIR; (2) The retiringofficial or employee has been in the service of the same employer for

at least ten (10) years; (3) The age must be at least 50 years old atthe time of retirement; and (4) The benefit of exemption can be

availed of only once.

Separation benefits consisting of the market value/zonal value ofthe residential lot, is tax exempt (BIR Ruling No 056-95)

3 ANSWER: C

Letter A refers to “deductions from gross income.”

Letter B refers to “tax exemption.”

Letter D refers to “tax credit.”

Exclusion refers to income received or earned but is not taxable asincome because exempted by law or treaty Such tax free income arenot to be included in the income tax return unless informationregarding it is specifically called for (Sec 61, Regs.)

4 ANSWER: A

This is a case of key insurance where the company insures the life

of its key employee The proceeds is not taxable to the corporationbecause it is considered as an indemnification for the loss of thepresident which is one of the company's key employees

5 ANSWER: A

The P3,500,000 is exempt from income tax because it is given asindemnification for the loss on the destruction of the companybuilding

been deleted in the Tax Reform Act Therefore, interest on governmentsecurities are now subject to tax.

9 ANSWER: A

The phrase "personal injuries" which are exempt from income taxincludes moral damages awarded by the court on account of mentalanguish experienced by one person due to libelous statements madeagainst him

10 ANSWER: C

Prizes amounting to P10,000 or less are to be included in thecomputation of gross income They are not subject to final tax

11 ANSWER: C

The amount of P1,500 given by his mother to Luis is in the form of

a condonation or gift and not a taxable income

12 ANSWER: D

Dismissal from employer due to inefficiency in service is a causewhich is not beyond the control of the employee Under the “beyondthe control test,” whenever an employee is separated from service for

a cause or causes which is/are beyond his control, the separation payreceived by him is not subject to tax

13 ANSWER: D

Damages received by a taxpayer due to physical injuries orsickness are not taxable to him However, damages received ascompensation for lost profits are subject to tax

14 ANSWER: D

Thirteenth month pay and other benefits are exempt from incometax However, the amount in excess of P30,000 are taxable to theemployee

Actual amount of salaries received 24,750

2 a Yes, Allen is qualified as head of family because of his mother who is

dependent upon and living with him

b No An aunt is not a qualified dependent for purposes of claiming thestatus of head of family Moreover, the aunt is not living with thetaxpayer

c Yes Cindy is already a widow and she is supporting her daughter wholives with her

d No A taxpayer who is separated in bed and board with the spouse butnot legally separated maintains the status of a married taxpayer

e No A benefactor of a senior citizen would be qualified to acquire thestatus of a head of family regardless of whether such senior citizen is arelative or not if the senior citizen is living with the taxpayer.

3 a In the absence of an agreement, John has the right to claim the

additional exemption because under Revenue Regulation 2-98,husbands have the right to claim additional exemption on thedependent children Besides, he has actual custody over the twochildren

b If Marsha could prove that she provided chief support over the children,both spouses would be disqualified to claim additional exemption.Marsha is disqualified because the children are not living with herdespite the support she is extending John is disqualified because hedoes not furnish chief support to his children

c Yes, because not one of them can claim P50,000 which is the amountallowed to each married individual taxpayer At most, they wouldacquire only the status of either single or head of family dependingupon the circumstances surrounding the case

4 a Julio is the one qualified to claim as head of family because he is

providing chief support to his mother who is also living with him Therest are giving only minimal amount of support

b None Additional personal exemption can be claimed only ondependent children

5 a None Aunties are not qualified dependents for purposes of claiming

additional exemption

b None The mother is not a qualified dependent

c None The daughter is disqualified because of her age She is alreadymore than 21 years old

d None Both Decepeda and his sister cannot claim additional exemption

on their father

e P 100,000 Elantra is allowed to claim dependents on his four childrenonly

6 a Carina is qualified as head of family She is already a widow and has

one dependent daughter living with her

00Less: Personal exemption

Less: Personal exemptions

11,500

623,251.27 x 32% 199,440.

41

419

b Interest on bank deposit - Passive income – tax exempt

P10,000)

h Dividends from domestic

Less: Withholding tax 10,100

Income tax payable ( 6,6

5,000 x 20% 1,000

Less: Withholding tax 15,000

Income tax payable ( 5,500)

Income tax – Juan ( 6,600)

Income tax – Maria ( 5,500)

Income tax payable 12,100

11

Times number of months in a year 12

b

Times number of months in a year 12

c

No amount of health or hospitalization insurance premium isdeductible because the total income of the family exceedsP250,000

d

Times number of months during the year 8

Dividend from C Corp (6,000 x 10%) 600

Total income exempt from income tax 233,50

0

EXERCISE 6 - 3

1 Interest on bank deposit with Banco de

2 Interest on bank deposit with a bank in the

13 Share of partner in net income of taxable

14 Interest income under expanded foreign

EXERCISES 6–4.1

1 ANSWER: A

Under the Tax Reform Act, only resident citizens are taxable onincome derived from sources within and without the Philippines Allothers are taxable on income within only

5 Lotto winnings in the Phils YES NO NO NO

9 Interest, bank deposit in

Taxpayer is resident citizen.

0

0Business income, Canada

00Less: Deductions

Expenses, Philippines 220,00

0 Expenses, Canada

00Less: Personal exemptions

Less: Withholding tax 10,000

2 ANSWER: C

Total final taxes paid:

Dividend from a domestic

Share in income of business

0Less: Optional deductions

Taxpayer is a resident alien.

Basic personal 50,00

0 Additional exemption

0

Nonresident alien ETB.

Taxpayer is NRA NETB.

00Dividend from a domestic

Corporations can avail also of optional standard deductions

Deductions should not be made for items not ordinarily used incomputing the cost of goods sold

PROBLEM 6-5.3

1 ANSWER: A

0Professional income (83,000 + 7,000) 90,00

Tax on P 140,000 22,50

0 82,500 x 25% 20,625

Less: Tax credit

Withholding tax on

Wages

P 5,000 Professional income

7,000 Rent (60,000-57,000)

0Less: Personal exemption

Personal exemptions are arbitrary amounts allowed in the nature of

a deduction from the amount of gross compensation income and/or netbusiness and/or professional income, as the case may be, for personal,living or family expenses of an individual (Sec 9, Regs.)

2 ANSWER: A

Nonresident aliens not engaged in trade or business in thePhilippines are not allowed to claim personal exemptions They aresubject to final tax based on the entire gross income derived fromsources within the Philippines

Senior citizens are not considered as qualified dependents by itsbenefactor for purposes of claiming the additional exemptions.

Illegitimate children are now considered as qualified dependents forpurposes of additional exemption provided that all the other requisitesare complied

6 ANSWER: C

The husband is the proper claimant of the additional exemptionsexcept when he does not derive any income from sources within thePhilippines or he explicitly waives his right in favor of his wife

7 ANSWER: D

No matter how big is the income of the wife as compared to thehusband, if the latter does not waive his right to claim the additionalexemption or he is a nonresident and his income is not purely derivedfrom sources without, he will always claim the additional exemption

8 ANSWER: B

In cases of personal exemptions, only NRA ETB are subject to the law

on reciprocity Nonresident aliens who shall come to the Philippines andstay therein for an aggregate period of more than 180 days are deemedNRA ETB

9 ANSWER: D

A moron, although mentally defective shall not qualify asdependent because he is not actually financially dependent from thetaxpayer

A child of a marriage which has been declared void ab initio is aqualified dependent for purposes of additional exemption

A child pursuing his studies elsewhere is deemed living with thetaxpayer He is considered “away temporarily” from the taxpayer’shome

A dependent receiving a salary of P1,000 monthly is not considered

as gainfully employed

10 ANSWER: D

The term “benefactor of a senior citizen” pertains to any personwho takes care of a senior citizen as his dependent, whether or notrelated to him

EXERCISES 6-6.2

1 ANSWER: C

The taxpayer is qualified as head of family because of the legitimateand recognized natural child

Only legitimate, illegitimate (which includes recognized natural child)

or legally adopted children can qualify as dependent for purposes ofclaiming additional exemptions Thus, common law husband and widowedmother of common law husbands are disqualified The total personal andadditional exemptions is:

0Additional exemptions:

00 Illegitimate child (recognized

The personal exemptions allowed shall be the lesser amount betweenthat allowed in his country and the amount fixed as exemption for citizens

or residents in the Philippines

Less: Personal exemption (50,000

6 Answer: A

Less: Personal exemptions

0 Additional (25,000 x 4) 100,0

7 Answer: C

Less: Personal exemptions

0 Additional (25,000 x 2) 50,00