Income taxation by valencia chapter 11 (income tax of individuals)

False – Tax credit of income taxes paid outside the Philippines is allowed only for resident Filipino citizen.. False – Gross income includes other income but not compensation income.. A

CHAPTER 11

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 Problem 11 – 4 Problem 11 – 5

1 D 1 D 1 Not in the choices P25,000 per child (R.A 9504)

2 D 2 B 2 Not in the choices P50,000 basic (R.A 9504)

10 C

Problem 11 – 6 A

Income from the Philippines (P10,000 x 12) P120,000 Less: Personal exemption – single 50,000 Income subject to tax in the Philippines 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 – 7 C

Gross compensation income – Philippines (P250,000 x 12) P3,000,000 Multiplied by special income tax rate 15%

Problem 11 – 8 A

Basic personal exemption of couple:

Additional exemptions:

4 qualified dependent children (P25,000 x 4) 100,000

Problem 11 – 9 C

Only P50,000 basic personal exemption because the taxpayer’s category is single

Problem 11 – 10 B

Problem 11 – 11 C

Additional exemption (a & b only) (P25,000 x 2) 50,000 Total personal and additional exemptions P100,000

Problem 11 – 12 A

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

Subject to

1 Not in the choices = P790,000 & P160,000 Tabular tax Final tax

Business and other income:

Professional income (P300,000 + P200,000) 500,000

Dividend income – without 40,000

Total net income before personal exemption P840,000

Less: Basic personal exemption – single ( 50,000)

Net income to ITR – tabular tax P790,000

2 A

Business income:

Total net income before personal exemption P540,000

Less: Basic personal exemption – single 50,000

Net income to ITR – tabular tax P490,000

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

Subject to

Compensation income P240,000

Business and other income:

Professional income (P300,000 + P200,000) 500,000

Dividend income – without 40,000

Total business and other income P600,000

Less: OSD (P600,000 x 40%) ( 240,000)

Total net income before personal exemption P600,000

Less: Basic personal exemption – single ( 50,000)

Net income to ITR – tabular tax P550,000

2 Not in the choices = P370,000 & P160,000

Business income:

Professional income, net of OSD (P300,000 x 60%) 180,000

Total net income before personal exemption P420,000

Less: Basic personal exemption 50,000

Net income to ITR – tabular tax P370,000

Problem 11 – 18 D

Husband Wife

Less: Withholding tax 20,000 45,000

Problem 11 – 19 D

Less: Personal exemption – married 50,000

Interest income tax (P500,000 x 7.5%) 37,500

Problem 11 – 20 D

Capital gains tax on shares of stock (P80,000 x 5%) P 4,000 Capital gains tax on sale of land (P2,000,000 x 6%) 120,000

Problem 11 – 21 B

1 B

Final tax on copyright royalty (P11,250/90%) x 10% P 1,250 Final tax on mineral claim royalty (P12,000/80%) x 20% 3,000 Final tax on share from trading partnership as dividend (P270,000/90%) x

2 Not in the choices

None All reported earnings are subject to final tax

Problem 11 – 22 B

Withholding tax (P100,000 x 20%) P 20,000

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

P 96,000 11,000 7,890 1,960 60,000 P176,850 32,315 P209,165

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

P25,000 5,000

P500,000

209,165 P290,835 30,000 P320,835

3 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

P 50,000 75,000

P320,835

125,000 P195,835 Tax on P140,000

Tax on excess (P55,835) x 30%

Income tax due

P 22,500 13,959

P 36,459

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

P 20,000

26,800

P375,000

325,000

P 50,000 150,000 70,000 P270,000 2,000 P268,000

46,800 P221,200

150,000

P 71,200

2 P140,000

Corrected net taxable income

Less: Reported net income subject to tax

Unreported taxable income

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

P 400,000

150,000

P 50,000

100,000

P 20,000

250,000 P270,000

150,000 P120,000

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

P 8,500 10,000

P 18,500 1,000

P 17,500

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

P 400,000

160,000

P 50,000

100,000

P 20,000

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

P 8,500 8,000

P 16,500 1,000

P 15,500

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 40,000 15,000 (10,000) P45,000 35,000

P 50,000 75,000

P 600,000

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

1 Compensation income (P240,000 + P30,000) P270,000 Less: Personal exemption (P50,000 + P25,000) 75,000

Net loss from business (P20,000) 0

Problem 11 – 28

Add: Taxable 13th month pay (P35,000 – P30,000) 5,000

Medicare/Philhealth contribution 2,000 5,000 Taxable compensation income before personal

Estimated income tax due:

Total income tax due per year P68,000 Divided by number of months in a year 12

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

Business income

Net income before personal exemption P3,500,000 Less: Personal exemption - basic P50,000

Additional (P25,000 x 4) 100,000 150,000

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 excess (P2,850,000 x 32%) 912,000

3 Tax credit

Creditable withholding tax on fees

Business income tax paid - Philippines 40,000

Japan (P1,037,000 x 1,000,000/3,500,000))

P296,286 vs actual P300,000, lower 296,286 P 636,286

4 Income tax still due (P1,037,000 – P636,286)) P 400,714

Alternative Solution of Problem 11-29: If Rosanna Roces opted to use OSD

Business income

Net income before personal exemption P2,100,000 Less: Personal exemption - basic P50,000

Additional (P25,000 x 4) 100,000 150,000

Tax on excess (P1,450,000 x 32%) 464,000

3 Tax credit

Creditable withholding tax on fees

Business income tax paid - Philippines 40,000

Japan (P589,000 x 594,000*/2,100,000))

P166,603 vs actual P300,000, lower 166,60

3 P 506,603

4 Income tax still due (P589,000 – P506,603) P 82,397 Supporting computation of net taxable income before personal exemptions:

Within Outside Total

Gross receipts 2,500,000 1,000,000 3,500,000

Allocated OSD x percent 994,000 406,000 1,400,000 Net income before personal exemption 1,506,000 594,000 2,100,000

Problem 11 – 30

Mr Bravo Mrs Bravo

Gross professional income (P100,000/90%) P111,111

Gross compensation income 225,000 300,000

Less: Personal exemptions 150,000 50,000

Tax on excess:

Mrs Bravo (P150,000 x 30%) 45,000

Withholding tax on compensation ( 25,000) ( 50,000) Withholding tax on professional income (P111,111 – P100,000) ( 11,111) Income tax still due and payable P 39,722 P 45,000

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 Mrs Bravo

Gross professional income (P100,000/90%) P111,111

Add: Gross compensation income 225,000 300,000

Less: Personal exemptions 150,000 50,000

Tax on excess:

Mrs Bravo (P90,000 x 30%) 27,000

Withholding tax on compensation ( 25,000) ( 50,000) Withholding tax on professional income (P111,111 – P100,000) ( 11,111) Income tax still due and payable P 9,306 P 27,000

Problem 11 – 31

1 P290,000

Taxable 13th month pay and bonuses (P40,000 – P30,000) 10,000 Net business income (P400,000 – P300,000) 100,000 Capital gains – long-term (P60,000 x 50%) 30,000

Less: Personal exemptions (P50,000 + P100,000) 150,000

2 (P8,000)

Less: Income tax paid on:

Quarterly business income 20,000 70,000

Problem 11 – 32

Gross income from business (P1,000,000 – P700,000) P 300,000 Operating expenses (P250,000 – P60,000 – P30,000) ( 160,000) Deductible interest expense (P30,000) – (P20,000 x 12/32) ( 22,500) Deductible contribution (P300,000 – P160,000 – P22,500) x 10% ( 11,750)

Capital asset transactions:

Capital gains – short-term (P300,000 x 100%) P 300,000

Capital losses – long-term (P400,000 x 50%) 200,000 100,000

Gambling losses (excess cannot be deducted from other

Gross compensation income (P180,000 + P20,000) 200,000 Taxable 13th month pay (P35,000 – P30,000) 5,000

Less: Personal exemptions (P50,000 + P100,000) 150,000

Less: Withholding tax on compensation 20,000

Problem 11 – 33

Other benefits:

Excess of clothing allowance (P4,500 – P4,000) P 500

Excess of rice subsidy (P1,600 – P1,500) x 12 1,200 1,700 Total (not exceeding P30,000) – nontaxable P26,700 Allowable de minimis:

Rice subsidy (P1,500 x 12) 18,000 22,000 Total 13th month pay and other benefits P48,700

Withholding tax from January to November 2009

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

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

Less: Tax credits:

WTW from Jan to Nov., 2009 P22,917

WT on Professional income (P224,000 – P200,000) 24,000 46,917 Income tax still due and payable on December 31, 2009 P295,203

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: Philippines U S A Total

Within (P180,000/90%) P200,000

Without ($2,250/90%) x P50 P125,000 P325,000 Commissions:

Within (P57,000/ 95%) 60,000

($1,200/80%) x P50

Dividend-without ($1,800/90%) x P50 100,000 100,000

Less: Personal exemption – basic 50,000

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

P20,000 3,000 40,000

P125,000 19,200 P144,200

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

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

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

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

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 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:

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).