Chapter 5: Exclusion from Gross Income

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

CHAPTER 5

EXCLUSION FROM GROSS INCOME

Problem 5 1 TAXABLE OR NONTAXABLE with income tax
1 Taxable
11 Taxable
21 Nontaxabl
.
.
.
e
2 Nontaxable
12 Taxable
22 Taxable
.
.
.
3 Taxable
13 Nontaxabl 23 Nontaxabl
.
.
e
.
e
4 Nontaxable
14 Taxable
24 Taxable
.
.
.
5 Taxable
15. Nontaxabl 25 Nontaxabl
.
e
.
e
6 Nontaxable
16 Nontaxabl
.
.
e
7 Nontaxable
17 Taxable
.
.
8 Taxable
18 Taxable
.
.
9 Nontaxable
19 Taxable
.
.
10 Nontaxable
20. Taxable
.
Problem 5 2 TAXABLE OR NONTAXABLE with income tax
1 Nontaxable
11 Taxable
21 Nontaxabl
.
.
.
e
2 Taxable
12 Taxable
22 Nontaxabl
.
.
.
e
3 Nontaxable
13 Nontaxabl 23 Taxable
.
.
e
.
4 Taxable
14 taxable
24 Nontaxabl
.
.
.
e
5 Nontaxable
15. Nontaxabl 25 Nontaxabl

Chapter 5: Exclusion from Gross Income

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

.
6
.
7
.
8
.
9
.
10
.

Nontaxable
Taxable
Taxable
Taxable
Nontaxable

16
.
17
.
18
.
19
.
20.

taxable

26
.
27

Taxable

taxable
Nontaxabl
e
Nontaxabl
e
Nontaxabl
e

28

Nontaxabl
e
Taxable

29

Taxable

30

Nontaxabl
e

Problem 5 3 TRUE OR FALSE

1. True
2. False only Philippine charity sweepstakes are not subject to
tax in the Philippines.
3. False subject to normal tax, in general
4. False nontaxable because the other income is subjected
only to final tax.
5. True
6. True
7. False Proceeds of life insurance is not taxable regardless of
whoever would be the recipient, except when the insured
person outlived his life insurance and received the proceeds.
The excess of proceeds over premium paid is taxable.
8. False include in gross income
9. False Bequest is a personal property.
10.
True
11.
True
12.
True
13.
False nontaxable because it is just a return of
expenses
14.
True, in general
15.
False nontaxable

Chapter 5: Exclusion from Gross Income

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Problem 5 4 TRUE OR FALSE

1. True
2. False nontaxable because aliens are taxable only for
income derived within the Philippines.
3. False the P3M capitalization does not include the land
asset of BMBE.
4. True
5. True
6. False nontaxable
7. False nontaxable in general
8. True
9. True
10.
False some prizes and awards are exempt by law
from taxation.
11.
True
12.
True
13.
False Include in gross income because income from
gift is subject to income tax.
14.
False Tax-exempt
15.
True
Problem 5-5
1. D
2. D
3. C
4. C
5. A
6. D
7. C
8. D
9. A
10 C
.

Problem 5-6
1. A
2. D
3. D
4. B
5. A
6. B
7. C
8. B
9. D
10 D
.

Problem 5 8
A
Basic minimum wage

Problem 5-7
1. B
2. D
3. C
4. D
5. B
6. D
7. A
8. D
9. C
10 D
.
P 90,000

Chapter 5: Exclusion from Gross Income

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

13th month pay

15-day monetized unavailed
leave
Overtime pay
Holiday pay
Christmas bonus (de-minimis)
Total nontaxable income
Problem 5 9
13th month pay

vacation

24,000
2,250
5,000
P132,500

Deductible from gross compensation

income:
SSS contribution
Philhealth contribution

P
6,500
P3,000
2,500

Amount excluded from gross income

Problem 5 10
Dividend income

7,500
3,750

5,50
0
P12,00
0

P
60,000

Interest income on EFCD to be taxable in the

Philippines must be transacted with residents.
Problem 5 11
B
Income from the Philippines:
Wagwag business (P5,000 x 12)
Sari-sari store (P20,000 x 12)
Gross taxable income in the Philippines

P 60,000
240,000
P300,000

Chapter 5: Exclusion from Gross Income

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Problem 5 12
D
th
13 month pay (P390,000/13)
De minimis with the ceiling amount:
Rice subsidy (P1,500 x 12)
Clothing allowance
Amount of nontaxable compensation

P30,000
18,000
4,000
P52,000

The excess of rice subsidy over the ceiling is already taxable,

because the 13th mo. pay is already P30,000.
Problem 5 13

Total basic salary

13th month pay
Excess rice subsidy
De minimis rice subsidy (P24,000
P6,000)
Total nontaxable compensation

Taxable Nontaxable
P240,000
20,000
6,000
.
18,000
P240,000

44,000

The P6,000 excess of rice subsidy is still exempt because if

combined w/13th mo pay and other benefit the amount does not
exceed P30,000.
Problem 5-14
D
MWE
Basic salary
Overtime pay
Hazard pay
Holiday pay
13th mo. Pay
Excess rice subsidy
Rice subsidy w/in ceiling
Total nontaxable
Taxable

P 96,000
20,000
2,000
1,000
8,000
6,000
18,000
P151,000
P
0

Chapter 5: Exclusion from Gross Income

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Problem 5-15

B
Taxable

MWE:
Basic salary
o.t. pay
hazard pay
holiday pay
13th mo.+ similar benefits:
13th mo. Pay
Excess rice subsidy
Excess clothing to complete P30,000
Rice subsidy de minimis
Clothing allowance
Total

Nontaxable

P108,00
0
30,000
2,000
1,000

13,000

9,000
18,000
3,000
18,000
4,000

.
P154,0 P52,000
00

An employee who receives additional compensation such as

commissions, honoraria, fringe benefits, benefits in excess of
the allowable statutory amount of P30,000, taxable
allowances and other taxable income other than the SMW,
holiday pay, overtime pay, night shift differential pay and
hazard pay shall not enjoy the privilege of being a MWE and,
therefore, his/her entire earnings are no longer exempt from
income tax.
Problem 5-16

D
Taxable

Non-

Chapter 5: Exclusion from Gross Income

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

taxable
MWE:
Basic salary
o.t. pay

96,000
20,000

13th mo.+ similar benefits:

13th mo. Pay
Excess rice subsidy
Rice subsidy
Rent income
Interest income, 4,000/80%
Total

8,000
6,000
18,000
60,000
5,000
181,00
0

32,000

MWEs receiving other income, such as income from the

conduct of trade, business, or practice of profession, except
income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire
income earned during the taxable year.
5-17
D
Only P1,500 sickleave benefit actually taken.

Problem 5 18
C
Take home pay
Nontaxable 13th month pay
Withholding tax
Other income subject to normal tax
Taxable income

P212,000
( 17,500)
13,500
20,000
P228,000

Chapter 5: Exclusion from Gross Income

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

In general, a MWE is not subject to WTW and income tax on his

compensation income. But if he has other income that is subject
to normal tax, his entire income during the year will be subject to
income tax, his compensation income, however, will not be
subject to WTW.
Problem 5 19

Net pay
Withholding tax
Advances
3th month pay
Christmas bonus (de minimis)
SSS contribution
Totals
Problem 5 20

Taxable Nontaxable
P265,000
50,000
6,000
(27,000)
P27,000
( 5,000)
5,000
.
4,000
P289,000
P36,000

Taxable Tax-exempt
Net take home pay
P13,000
SSS contributions
P300
PAG-IBIG contributions
100
Union dues contributions
100
Office party contributions
75
Charitable contribution (deductible only from
25
business income)
Withholding income tax
400
.
Totals
P13,500
P500
Problem 5 21
D
Monthly salary
Free board and lodging is for convenience of employer.
Problem 5 22
Rent of apartment
Reimbursement
Taxable benefits

P15,000

P 50,000
20,000
P70,000

Note that the tax base to determine the tax liability of supervisor
should be the grossed-up amount, meaning P70,000/68%.

Chapter 5: Exclusion from Gross Income

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Problem 5 23
D
Proceeds of life insurance including 12% interest for
2 years
Less: Present value of life insurance proceeds
(P1,254,400 x 0.797193877)
Interest income - Taxable

P1,254,4
0
0
1,000,0
0
0
P
2
5
4
,
4
0
0

Proceeds of life insurance policy are not taxable but the interest
thereof is taxable. (Rev. Rev.2, Sec.22; Sec.32Ba, NIRC)
Problem 5 24
D
Proceeds of life insurance policy are
not taxable.
Problem 5 25
B
Maturity value received
Premium paid
Premium refund
Income in excess of premium paid

P500,000
(490,000)
40,000
P 50,000

The premium refund is actually a decrease of premium paid.

Problem 5 26
D
Zero, because, the P270,000 cash surrender value is just a partial
return of total contribution of P360,000.

Chapter 5: Exclusion from Gross Income

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Problem 5 27
D
Car insurance
Accident insurance
Life insurance as beneficiary
Cash surrender value of life insurance
Participating dividend
Total amount excluded from gross
income

P300,000
100,000
500,000
30,000
10,000
P940,000

The participating dividend and cash surrender value are

considered return of premium. The interest income, however, is
included in the gross income. It represents income from the use of
insurance proceeds not yet taken. (Sec. 62, Regs. No. 2)
Problem 5 28
1 Letter C
.
Total premium paid excluded

P500,000

The total premium paid is excluded because such amount

represents return of capital. [Sec. 32 (B)(2), NIRC]
2 Letter A
.
Total consideration received excluded

P2,000,000

The proceeds of life insurance policies paid to the heirs or

beneficiaries upon the death of the insured are excluded from
the gross income of the beneficiary. [Sec. 62, Regs. No. 2; Sec.
32 (A) (1), NIRC]
Problem 5 29

Actual damages for unrealized profit

Interest on non-taxable damages
Actual damages for lost products

Taxable

Nontaxa

P100,00
0
20,000

P200,00

Chapter 5: Exclusion from Gross Income

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Exemplary damages due to injuries

Moral damages due to injuries
Actual liquidated damages
Total

.
P120,00
0

0
50,000
50,000
80,00
0
P380,00
0

Note: On the part of Ernie Barron, the attorneys fee is only a

reimbursement of his judicial expenses, but on the part of the
counsel, such amount is reportable income.
Problem 5 30
Taxable income

P -0-

Problem 5 31
A
The retirement pay should be included in the gross income
because Max retired at an optional age and has rendered less
than 10 years in service. To be excluded from gross income, an
employee should have been in the service of the same employer
for at least ten (10) years and at least 50 years at the time of his
retirement. [Sec. 32 (B)(6)(a), NIRC]
Problem 5 32
C
Cost of life annuity contract
Divided by expected return (P360,000 x
15 years)
Cost ratio
Multiplied by annual pension
Annual amount of pension excluded from
gross income
Problem 5 33
Terminal pay
Life insurance
SSS death benefit

P1,350,000
5,400,000
25%
360,000
P
90,000

Taxable

Nontaxable
P 60,000
500,000
10,000

Chapter 5: Exclusion from Gross Income

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Donations
Totals

.
P - 0 -

40,000
P610,000

Problem 5 34
A
The termination is due to cause within the control of Jalosjos,
separation pay is taxable.
Problem 5 35
D
Last pay upon resignation from his
first employer

P100,000

Problem 5-36
B
SSS death benefit of P36,000
Problem 5-37
A
Sickness benefit (P300 x 6 days x 90)
Maternity benefit (P300 x 78 days x 100%)
Total exclusion

P 1,620
23,400
P25,020

SSS sickness benefit is equal to 90% of daily salary credit after

compliance with certain conditions. SSS daily maternity leave
benefit is equivalent to the average daily salary credit for 60 days
or 78 days in case of caesarian delivery, subject to certain
conditions. [Sec. 14, R.A. 1161; R.A. 8282, as amended]
Problem 5 38
A
Zero, all items enumerated are not subject to income tax.
Problem 5 39
C
Interest income from bank savings deposit, subject
to final tax at source

P4,000

His annual income from professional fee is not more than P60,000
which is exempt.
Problem 5 40
D
Zero. Gifts are generally subject to donors tax and are not subject
to income tax.

Chapter 5: Exclusion from Gross Income

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Problem 5 41
D
Total income (P100,000 x 10 months)
Total average expenses (P20,000 x 10
months)
Income subject to income tax

P1,000,000
( 200,000)
P 800,000

Problem 5 42
D
Zero. All winnings received by Miss Lara are subject to tax
because she has entered into a contest (Miss International) which
requires rendition of subjstantial future services as a condition to
receive such prize or award.
Problem 5 43
A
Lotto Philippine winnings
Problem 5 44
B
Ramon Magsaysay award
Athlete of the year award
Prize for winning the silver Olympic
medal
Cash award from Mr. Lim
Car from Nissan
Winnings Philippine sweepstakes
Total winnings/awards not subject to
income tax
Problem 5 45
A
Interest income
Gain from sale of bonds classified as capital asset
Taxable income

P10,000,00
0
P

50,000
100,000
500,000

250,000
1,000,000
100,000
P2,000,000

P 60,000
140,000
P200,000

Interest income on government bonds is taxable. Gain from sale

of certificate of indebtedness is tax-exempt only when the
maturity is more than 5 years. [Sec. 32 (B)(7)(g), NIRC]
Problem 5 46
B
Interest received from bond

P 120,000

Chapter 5: Exclusion from Gross Income

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

investment
Problem 5 47
Interest income

Problem 5 48
D
Interest on expanded foreign currency
deposit
Problem 5 49
A
Income from sale of invented products
Sale of technology
Total revenue
Less: Research and development costs
Nontaxable income

P120,000
P100,000

P5,000,000
2,000,000
P7,000,000
800,000
P6,200,000

Note: The cost of product produced need not to be deducted

anymore because of the term income from sale of invented
products.
Problem 5 50
C
Interest income on bank savings
deposit

P10,000

Problem 5 51
C
Interest income from foreign currency deposit
Interest income from time deposit
Total taxable income

P2,000,000
1,000,000
P3,000,000

Problem 5 52
1. Compensation income (P5,000 x 10)

P 50,000

2. Retirement benefits
Salary earned
Gross income

P500,000
50,000
P550,000

3. Same answer with No. 1

P 50,000

Chapter 5: Exclusion from Gross Income

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Problem 5 53
Winnings from charity horse race sweepstakes
from PCSO
Gains from redemption of shares in mutual fund
Gain from sale of bonds with maturity of more
than five years
Gifts from friends
Total exclusion from gross income
Problem 5 54
Proceeds of his life insurance (P2,000,000)
(P15,000 x 25)
Proceeds of his mothers life insurance
Cash gift
Inheritance
Rent income
Total

P 500,000
300,000
60,000
200,000
P1,060,000

Exclu
de
P
375,000
1,000,00
0
50,000
3,000,00
0
.
P4,425,0
00

Incl
ude
P1,625,
000

100,
000
P1,725,
00
0

Problem 5 55
No, the P1,500,000 transfer to be received by Miss Tandana is to
be included for income taxation because the transfer is in
recognition of her services rendered. It is not to be included as a
part of estate tax.
Problem 5 56
Dividend income
Interest income
Prizes
Total taxable income

P50,000
2,000
25,000
P77,000

Chapter 5: Exclusion from Gross Income

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Problem 5-57
1. None the taxpayer is a MWE and the benefits does not exceed
the allowable statutory amount of P30,000.
2.

Gross compensation
SSS premium
Philhealth premium
Taxable compensation income

P109,2
00
( 2,40
0)
( 3,00
0)
P103,8
00

Problem 5 -58
Answer for both no. 1 and no.2
Compensation
SSS premium
Philhealth
Gross taxable compensation
income

P128,000
(2,400)
(3,000)
P122,600

Note: The MWE with earnings subject to normal tax shall be

taxable for his entire income during the year.
Problem 5 -59

1 Time deposit
.

P60,000

Chapter 5: Exclusion from Gross Income

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Foreign currency deposit

Cooperative income subject to final tax
2 Cooperative income subject to normal tax
.

10,000
P70,000
P -0-

The cooperatives ordinary income such as sales and income

from lending to members are not subject to income tax.