ESTATE TAX: DEDUCTIONS FROM GROSS ESTATE

DEDUCTIONS FROM GROSS ESTATE

➢ There are charges which naturally diminish the amount of the inheritance of the heirs. Hence, the law allows
deductions from gross estate. In addition to these charges, the law also allows certain deductions in the
nature of incentives from gross estate.

Presentation of deductions in the Estate Tax Return

Exclusive Conjugal/Communal Total

GROSS ESTATE P xxx,xxx P xxx,xxx Pxxx,xxx
Less: Ordinary deductions xxx,xxx xxx,xxx xxx,xxx
Claims against the estate xxx,xxx xxx,xxx xxx,xxx
Claims against insolvent persons xxx,xxx xxx,xxx xxx,xxx
Unpaid mortgages xxx,xxx xxx,xxx xxx,xxx
Property previously taxed (VD) xxx,xxx xxx,xxx xxx,xxx
Transfer for public use xxx,xxx xxx,xxx xxx,xxx
Others xxx,xxx xxx,xxx xxx,xxx
Estate after deductions P xxx,xxx P xxx,xxx P xxx,xxx
Less: Special Deductions
Family Home xxx,xxx
Standard deduction xxx,xxx
Others xxx,xxx
Net Estate P xxx,xxx
Less: Share of the surviving spouse X 1/2 > xxx,xxx
NET TAXABLE ESTATE P xxx,xxx

Note: For a single decedent, the column common properties will be left blank.
.
Classification of Deductions
A. Ordinary Deductions
B. Special Deductions
C. Share of the surviving spouse

➢ Ordinary deductions conceptually include items which diminish the amount of the inheritance. The only
exception here is the deduction for “Property previously taxed” which is a tax incentive but is classified as
ordinary deductions in pursuant to the estate tax form.

➢ Special deductions are items which do not reduce the inheritance but are nonetheless allowed by the law
as incentive deductions against gross estate in the determination of the net taxable estate,

➢ Share of the Surviving spouse pertains to the interest of the surviving spouse in the conjugal or communal
properties of the spouses. This portion is not owned by the decedent and will not be transmitted by the
decedent as part of the inheritance; hence, it must be removed in the taxable estate.
GENERAL PRINCIPLES OF THE ESTATE DEDUCTIONS

✓ The substantiation rules

As a rule, items of deduction must be supported with documentary evidence such as receipts, invoices, contracts, and
other proofs that they actually exist or occurred to establish their validity.

✓ Matching Principle
As a rule, items of deduction must pertain to properties that are part of the gross estate. They must be proper charges
thereto.

Examples:
A. Obligations of the exclusive properties of the surviving spouse cannot be claimed as deductions because said properties are
not included in the gross estate.
B. Losses of properties before the death of the taxpayer are not deductible because the properties are no longer part of the gross
estate of the decedent at the date of death.
C. Separate obligations or losses of exclusive properties of the surviving spouse cannot be deducted against the gross estate.

✓ “No double classification” rule

Items of deduction cannot be claimed simultaneously under several deduction categories.

Examples:
A. A family home which is destroyed by any casualty during the settlement of the estate cannot be simultaneously deducted as a
“family home” and a “casualty loss.”
B. Losses claimed in the income tax return of the estate cannot be claimed again as deduction in the estate tax return.

✓ Default presumption on ordinary deduction

In the case of married decedents, ordinary deductions are presumed to be against the common properties unless
proven to be an exclusive property of either spouse. This is in line with the rule that properties are common properties
unless proven to be exclusive.

Ordinary deductions
Under current usage, the following are deemed ordinary deductions:
1. Losses, Indebtedness and Taxes (LIT)
2. Transfer for Public Use
3. Vanishing deductions

LOSSES, INDEBTEDNESS AND TAXES (LIT)

Losses
➢ These pertain to losses of properties of the estate during the settlement of the estate. These may arise from
casualty such as fires, storms, shipwreck, robbery, theft or embezzlement when such losses are not
compensated for by insurance.

Date of death Deadline of return

Non-deductible here! Deductible if losses occurred here| Non-deductible here!
(1 year)
Points to Remember:
1. Loss must be sustained casualty loss.
2. The loss must occur during the settlement of the estate up to the deadline of the estate tax return.
3. The loss must not be concurrently claimed in the income tax return.
Illustration 1
Mr. Y died in a fatal car crash on November 2, 2019. The following losses of properties were identified by his estate
administrator:

Losses up of the point of death:

Value of car totally destroyed during the crash P 1,200,000
Pilferage loss on merchandise revealed by
the physical inventory count on October 31, 2019 80,000

Losses since the death of the decedent:

Fire loss on an insured building on December 25, 2019 P 2,000,000
Theft of personal valuables of Mr. Y on January 1, 2020 180,000
Value of cash robbed from Mr. Y’s residence on February 14, 2020 620,000
Value of an uninsured car destroyed by a storm on March 1, 2021 800,000
Unpaid loans receivable from a bankrupt customer 100,000

The deductible loss shall be:

Loss on theft of personal valuables P 180,000

Loss on robbery 620,000
Total deductible loss P 800,000

Illustration 2
Just before filing the return on June 15, 2020, the estate administrator noted the following losses in the estate of Mr.
Wong, a businessman who died June 30, 2019:

1. The $100,000 in Mr. Wong’s savings account. He purchased these dollars at P54/$ on June 30, 2019 and P52/share
on June 15, 2020.
2. Mr. Wong had an office equipment with book value P400,000 on June 30, 2019. the executor sold this for P350,000
on March 10, 2020 to settle claims against the estate.
3. Mr. Wong’s vault containing P300,000 inventories of precious metals was stolen on august 15, 2019. this was
claimed as deduction in the income tax return of the estate for 2019.

None of these losses is deductible.

Claims against insolvent persons

➢ Claims against insolvent persons is a form of loss but is presented as separate item of deduction in the tax
return. The deductible amount of claim against insolvent persons is the unrecoverable amount of claim.

Illustration 1
Mr. Kugar died with a total receivable of P200,000 from Mr. Kumag. The latter was adjudged bankrupt by the court with
only P800,000 total assets but with P2,000,000 in total liabilities.

Mr. Kugar would be expected to recover only P200,000/P2,000,000 x P800,000 or P80,000 from Mr. Kumag. The claim
from insolvent person shall be P200,000-P80,000= P120,000.

Assuming that there is zero recovery, the entire amount of claim shall be presented as a deduction. Either way, the
P200,000 claim must be included in gross estate.
Illustration 2
Mrs. Shelly died leaving a P500,000 promissory note from Dye Company a bankrupt company undergoing liquidation.
The note was secured by a small piece of land with current value of P300,000. The fiduciary of Dye Company estimates
a 40% recovery for unsecured creditors.

Mrs. Shelly also loaned Dye Company P20,000 in a written instrument which prescribed a few years prior to her death.

The claim against insolvent persons shall be computed as:

Recoverable amount P380,000

Less: Total claim 500,000
Claim against insolvent persons P120,000

The recoverable amount is computed as:

Total claim P500,000

Less: Fair value of collateral 300,000 P300,000
Unsecured portion P200,000
Multiply by: Recovery Ratio 40% 80,000
Recoverable amount P380,000

Note: The 20,000 waived loan which prescribed is not a claim against insolvent person since it is no longer an enforceable right at the point of
death.

Classification of Losses
Losses, including claims against insolvent persons shall be classified based on the “Property classification Rule”. The
loss of separate property is presented as a deduction against separate property. The loss of common property is
presented as a deduction against common property.

Claims against the estate (Indebtedness)

➢ The word “claims” as used in the statute is generally construed to means debts or demands of a pecuniary
nature which could have been enforced against the deceased in his lifetime and could have been reduced to
simple money judgments.

➢ Claims against estate or indebtedness with respect to property may arise out of contract, tort, or operations
of law.

➢ Unpaid mortgages are claims against the estate but are separately reported under the category “Unpaid
mortgage” in the estate tax return.

Requisites of deductibility of claims against the estate:

1. The liability represents a personal obligation of the deceased existing at the time of his death except unpaid medical expenses
2. The liability was contracted in good faith and for adequate and full consideration in money or money’s worth.
3. The claim must be a debt or claim which is valid in law and enforceable in court;
4. The indebtedness must not have been condoned by the creditor or the action to collect from the decedent must not have
prescribed.

Classification Rules for Claims against the Estate

1. Family benefit rule
➢ If the obligation was contracted or incurred for the benefit of the family, the claim shall be classified as
deduction against common property. Otherwise, the property classification rule shall be applied.
Examples:
a. A mortgage which was contracted for the education of the children of the spouses shall be deducted against common properties
even if the same is constituted against a separate property of either spouse.
b. An unpaid real property tax on the family home shall be deducted against common property even if the family home is a separate
property of either spouse.

2. Property classification rule

➢ Claims follow the classification of the relevant property.

Examples:
a. A mortgage or unpaid taxes on property inherited or acquired before marriage shall be classified following the classification of
the property based on the applicable family regime of the spouses.
b. An obligation arising from exclusive property shall be considered as deduction from exclusive properties unless it accrued or
was used for the benefit of the family.

Special rules on certain claims against the estate

1. Unpaid mortgage
➢ This includes mortgage upon, or any indebtedness, with respect to property where the value of the
decedent’s interest therein, undiminished by such mortgage or indebtedness, is included in gross estate.

Illutration1
A decedent had a family home worth P1,500,000 which was encumbered by a mortgage. Details about the mortgage
were as follows:

Mortgage A
Original amount P900,000
Less:
Paid before death P200,000
Paid after death 400,000
Present balance P300,000

The family home is a common property of the decedent and his spouse. The proceeds of the mortgage were used for
the family.

A deductible mortgage, just like other obligations, must have been incurred before death and remain unpaid at the
point of death. Hence, the allowable deduction for “Unpaid mortgage” shall be the balance of the mortgage at the point
of death:

Mortgage A
Original amount P900,000
Less: Paid before death 200,000
Balance at the date tax return: P700,000

Presentation in the tax return:

Exclusive Common
Gross estate P - P1,500,000
Deductions:
Unpaid mortgage P - P 700,000
Illustration 2
During the marriage, Mr. Y inherited a commercial lot with a zonal value of P4,000,000. When one of his children got
sick, he mortgaged the property for P2,000,000. He was able to pay P400,000 until his death.

Presentation in the tax return:

Exclusive Common
Gross estate P4,000,000
Deductions:
Unpaid mortgage P - P1,600,000

2. Unpaid Taxes
This includes taxes such as income tax, business tax, and property tax which have accrued as of the death of the
decedent and which were unpaid as of the time of death.

It must be emphasized that only obligations existing at the point of death are deductible. Obligations including taxes
which are settled before death and those accruing after death are not deductible from gross estate.

Hence, the following taxes are non-deductible:

a. Tax on income earned after death
b. Property taxes accruing after death
c. Business taxes accruing after death
d. Estate tax on the transmission of the estate to the heirs

It must be noted also that contemplated in RR2-2003 , “Claims against the estate” are restricted to private claims
against the decedent’s estate.

Although taxes are claims against the estate, taxes should be reported under a separate category, but since there is
no separate category for taxes in the estate tax return, the same shall properly be included under the category “Others.”

3. Accommodation loan
An accommodation loan is one contracted by a person in behalf of another person with the contracting person merely
representing in behalf of the other person who will be the beneficiary of the loan proceeds.

Accommodation loan are presented as a receivable in the gross estate and is presented as a deduction. However, if
there is a legal impediment to recognize the same as a receivable, it may not be included in the gross estate. Likewise,
it will not be presented as an obligation.

Illustration 1: Claim against the estate - unmarried decedent

The heirs identified the following obligations of Mr. Natoy, a bachelor, who died on September 1, 2019:

Personal loan condoned by the creditor P400,000

Balance on the purchase price of a car, paid by the heirs
on September 28, 2019 200,000
Prescribed promissory note 100,000
Bank Loan 300,000
Interest on bank loan, P30,000 accrued as of
September 1, 2019 50,000

The deductible “claims against the estate” shall be:

Unpaid balance on purchased car at point of death P200,000
Bank loan 300,000
Interest payable accruing as of date of death 30,000
Total deductible claims against the estate P530,000

Presentation in the estate tax return:

Exclusive Common
Claims against the estate P530,000 P 0

Illustration 2: Claim against the estate - married decedent

The executor of Mr. X compiled the following obligations:

Obligations of the exclusive properties of Mrs. X P500,000

Unpaid funeral expense 100,000
Unpaid medical expense 200,000
Obligations accruing after death 150,000
Obligations of family before decedent’s death 300,000
Obligations of the separate properties of Mr. X 600,000
Unpaid mortgage on family properties 1,000,000

The deductible “claims against the estate” shall be:

Obligations of the family before decedent’s death P300,000

Obligations of the separate property of the decedent 600,000
Total deductible claims against the estate P900,000

Presentation in the state tax return:

Exclusive Common
Claims against the estate P600,000 P300,000

TRANSFER FOR PUBLIC USE

➢ Transfer for public use includes the amount of all bequests, legacies, devises or transfer to or for the use of
the Government of the Republic of the Philippines, or any political subdivision thereof, for the exclusive public
purposes. These must be indicated in the decedent’s last will and testament.

Illustration
Mr. A devised in his will the following properties:
Commercial land, to a public school P 2,000,000
Land and building to a government-owned and controlled corporation (GOCC) P 3,000,000
Total P 5,000,000

The P5,000,000 must be include in gross estate. Only the P2,000,000 can be claimed as transfer for public use. GOCCs are commercial and are
not for public.

PROPERTY PREVIOUSLY TAXED (VANISHING DEDUCTION)

➢ There are instances where properties are transferred between persons in short periods of time causing a
series of transfer taxation.

Example:
a. The death of the decedent is preceded by a donation inter-vivos
b. The death of the decedent is preceded by a donation mortis causa

Case 1: Donation before death

＋
A Donates to → B →
↑ ↑
Donor’s tax estate tax

Case 2: Series of deaths

＋ ＋ ＋ ＋ ＋
A → B → C → D → E →
↑ ↑ ↑ ↑ ↑
estate tax estate tax estate tax estate tax estate tax

Note the series of double transfer taxation in both cases. Due to this, a deduction for property previously taxed is
allowed by the law against gross estate to mitigate the impact of successive transfer taxation. This deduction is
commonly known as “Vanishing Deduction”.

Requisites of Vanishing Deduction:

1. The present decedent must have died within five (5) years from date of death of the prior decedent or taxable gift of
the donor.
Donation/Succession ＋
∣ ← 5 years → X
Non-claimable here! Claimable if received in this period.

2. The property with respect to which the deduction is claimed must have been part of the gross estate situated in the
Philippines of the prior decedent or taxable gift of the donor

In short, the property must have been previously subjected to a transfer tax.

3. The property must be identified as the same property received from prior decedent or donor or the one received in
exchange thereof

Deduction is still claimed even if the property transformed into another kind of property.

4. The estate taxes on the transmission of the prior estate or the donor’s tax on the gift must have been finally
determined and paid.

The basis of vanishing deduction is to mitigate the impact of double taxation. Vanishing deduction cannot be claimed
if the donor’s tax or estate tax was not paid in the prior transfer.

5. No vanishing deduction on the property or the property given in exchange thereof was allowed to the prior estate.
This rule applies in the case of a series of deaths. If the prior estate claimed vanishing deduction, the second estate
cannot claim vanishing deduction because the purpose of vanishing deduction is to mitigate double taxation.

The double deduction with vanishing deduction

➢ The purpose of vanishing deduction is no other than to minimize the burden of double transfer taxation that
could occur when a decedent dies soon after receiving properties that are previously subjected to transfer
tax.
 ➢ This noble gesture from the government should not be constructed as permit for taxpayers to abuse claims
of deduction. In principle, vanishing deduction can be claimed only if there is an incidence of double transfer
taxation.

➢ Despite the absence of a rule prohibiting double deduction using vanishing deduction, there is no good
reason to claim vanishing deduction if the entire value of the property is already claim under:
a. Casualty losses
b. Transfer for public purpose
c. Family home

The property is effectively excused from taxation by being deducted under the aforementioned categories. There would
be no double taxation to occur. Hence, further claim of vanishing deduction should be disallowed.

Illustration 1
Mr. A died on June 3, 2019 with the following properties in his gross estate:

Property Mode of acquisition Date of acquisition

Condo unit Purchase July 1, 2018
Car Donation July 3, 2016
Residence Purchase 1 August 5, 2018
Commercial building Purchase 2 June 1, 2019
Agricultural land Inheritance April 1, 2014

Note:
1. Using money inherited from his father who died on July 15, 2017
2. Using money received by way of donation on December 25, 2011

Only the car and residence can be claimed with vanishing deductions.

Procedural Computation: Vanishing Deduction

1. Determine the initial value.

The initial value is the fair market value of the property at the date of the first transfer (I.e., date of prior decedent’s
death or date of gift) or the fair value at the date of death whichever is lower.

Illustration
The following relates to a property that was donated to the decedent:
Upon Donation Upon death of decedent
Zone Value P1,200,000 P900,000
Fair Value per assessor 1,100,000 1,000,000

The respective fair value at those dates shall be the higher:

Upon donation Upon death of decedent
Higher P1,200,000 P1,000,000

Hence, the initial value shall be the lower P1,000,000.

2. Determine the initial basis

The initial basis is the initial value reduced by any indebtedness on the property which was assumed and paid by the
present decedent before his or her death.
 Initial Value P xxx,xxx
Less: Indebtedness assumed and paid before death xxx,xxx
Initial basis Pxxx.xxx

3. Determine the final basis

The final basis is the initial basis reduced by a proportion of other ordinary deductions (i.e. LIT + transfers for public
purpose) which the initial basis bears over the gross estate of the decedent.

This is computed as:

Initial basis P xxx, xxx

Less:
Initial basis/Gross Estate) x (Losses, indebtedness, taxes and transfer for public purpose) xxx, xxx
Final basis P xxx, xxx

4. Determine the vanishing deduction.

The vanishing deduction is the final basis multiplied by the following vanishing percentages:

If the decedent died within Vanishing percentage

1 year from receipt of the property 100%
2 years from receipt of the property 80%
3 years from receipt of the property 60%
4 years from receipt of the property 40%
5 years from receipt of the property 20%
More than five years 0%

If more than one property qualifies for vanishing deduction, the properties shall be grouped and totaled on a per-year
basis.

It is because of these decreasing deduction percentages that the deduction for property previously taxed is referred to
as “Vanishing Deduction”. Also, due these yearly percentages, properties qualified for vanishing should be grouped
annual.

Illustration 1 - Basic procedures

Mr. H, a bachelor, died with the following properties and allowable deductions:
Value upon inheritance Value at death
Car received as inheritance 3 years ago P 1,200,000 P 1,000,000
Other properties 9,000,000
Gross estate P 10,000,000

Allowable ordinary deductions:

Mortgage on the car P 500,000 300,000
Indebtedness and taxes 1,400,000
Transfer for public use 300,000
Total ordinary deductions before vanishing deductions P 2,000,000

The vanishing deduction shall be determined as follows:

Initial value (lower of P1,200,000 and P1,000,000) P 1,000,000

Less: Mortgage assumed and paid (500,000-P300,000) 200,000
Initial basis P 800,000
Less: Proportional other ordinary deductions
Initial basis/Gross estate x LIT + TFPU
(P800,000/P10,000,000 x P2,000,000) 160,000
Final basis P 640,000
Multiply by: Vanishing percentage (3 years) 60%
Vanishing deduction P 384,000

Tax return presentation

These shall be presented in the estate tax return as follows:
Exclusive Communal Total
Gross estate P 10,000,000 P - P 10,000,000
Less: ordinary deductions
- Mortgage 300,000 - 300,000
-Debts and taxes 1,400,000 - 1,400,000
- Transfer for public use 300,000 - 300,000
- Vanishing deduction 384,000 - 384,000

Illustration 2 - Integrative application

Mrs. Z died on July 1, 2019 leaving the following properties upon on her death:

ACP: During Marriage

Ranch, received as inheritance from her father on June 30, 2017 P 2,000,000
Orchard, brought with money donated to Mr. And Mrs. Z
by a friend on December 18, 2107 3,000,000
Rest house, inherited by Mr. Z on March 21, 2016 4,000,000
Commercial land, donated by her mother on January 2018 1,000,000
Family home, from salaries of Mrs. X 2,000,000
Other Properties, from salaries of Mr. X 7,000,000

The estate of Mrs. Z clams the following deductions

Casualty losses on other properties P 400,000

Claims against the estate, inclusive of P100,000 funeral expenses 900,000
Unpaid mortgage on the ranch 600,000

Additional Information:
- The ranch had a fair value of P2,400,000 in the gross estate of her father and is subjected to P1,000,000 mortgage
at that time
- The orchard had a fair value of P2,500,000 on December 18, 2017.
- Mrs. Z mortgaged the orchard on January 1, 2018 for P1,500,000. P500,000 of the mortgage was paid before her
death.
- Mrs. Z designated in her will to donate the commercial land to a government agency for public use.

Required: Determine the vanishing deduction.

The gross estate shall be computed first as follows:

Exclusive Communal Total
Ranch P 2,000,000 P 2,000,000
Orchard 3,000,000 3,000,000
Commercial land 1,000,000 1,000,000
Family home 2,000,000 2,000,000
Other properties 7,000,000 7,000,000
Gross estate P 3,000,000 P 12,000,000 P 15,000,000

Note: the rest house is an exclusive property of Mr. Z., the surviving spouse; hence, it is excluded in gross estate.

The other ordinary deduction shall also be computed, as follows:

Exclusive Communal Total
Casualty losses P 400,000 P 400,000
Claims against the estate 800,000 800,000
Unpaid mortgage P 600,000 1,000,000 1,600,000
Transfer for public purpose 1,000,000 1,000,000
Total other ordinary deductions P 1,600,000 P 2,200,000 P 3,800,000

The vanishing deduction for the ranch and the orchard shall be computed as follows:

Initial value Exclusive Communal total

- Ranch (lower of P2m & P2.4M) P 2,000,000 P 2,000,000
- Orchard (lower of P2.5 M & P3M) P2,500,000 2,500,000
Total P 2,000,000 P 2,500,000 P 4,500,000
Less: Debts assumed and paid 400,000 0 400,000
Initial basis P 1,600,000 P 2,500,000 P 4,100,000
Less: Pro-rated deduction
Ranch: (P1.6M/ P15M x P1.6M) 170,667 170,667
Orchard: (P2.5M/ P15M x P2.2M) 366,667 366,667
Final basis P 1,429,333 P 2,133,333 P 3,562,666
Multiply by: 60% 80%
Vanishing deduction P 857,600 P 1,706,666 P 2,564,266

Note:
1. The mortgage on the orchard is a new indebtedness of Mrs. Z. It is not a passed-on pre-existing debt. Deduction for mortgage
or indebtedness payments pertains to mortgage or indebtedness on the property assumed and paid for the decedent.
2.) The ranch is June 30, 2017 to July 1, 2019 or 2+ years; hence, up to 3 or 60%.
3.) The orchard is December 18, 2017 to July 1, 2019 or 1+ years; hence, up to 2 or 80%.

Tax return presentation

These shall be presented in the estate tax return as follows:
Exclusive Communal Total
Gross estate P 3,000,000 P12,000,000 P15,000,000
Less: Ordinary deductions
- Casualty Losses - 400,000 400,000
- Claims against the estate - 800,000 800,000
- Unpaid mortgage 600,000 1,000,000 600,000
- Transfer for public use 1,000,000 - 1,000,000
- Vanishing Deduction 857,600 1,706,666 2,564,266

SPECIAL DEDUCTIONS
The following considered special deductions:
1. Family home
2. Standard deductions
3. Benefits under RA 4917

FAMILY HOME
➢ Family home includes the dwelling house, and the land on which it is situated, where the decedent and/or
members of his family reside as certified by the Barangay Captain of the locality. The family home is deemed
constituted on the house and lot from the time it is actually occupied as a family residence and is considered
as such for a long as any of its beneficiaries actually resides therein (Arts. 152 and 153 Family Code).

➢ To be considered family home, the residence shall be characterized by permanency. It is the place to which,
whenever absent for business or pleasure, one still intends to return.

➢ For purposes of availing of a family home deduction to the extend allowable, a person may constitute only
one family home (Art 161, Ibid)

Requisites for deduction of family home

1. The family home must be the actual residential home of the decedent and his family at the time of his death, as
certified by the Barangay Captain of the locality where the family home is situated.
2. The value of the family home must be included as a part of the gross estate of the decedent; and
3. The allowable deduction must not exceed the lowest fair market the value of the family home as declared or included
in gross estate, the extent of the decedent's interest therein, or P10,000,000.

Not only married decedents can claim family home. A single decedent who is a head of a family can also claim
deduction for family home. A single who is not a head of a family is not legally allowed deduction for family home.

Illustration 1
A decedent died leaving a family home with a fair value of P 17,000,000 at the date of his death.

The following shall be deductible for family home under each of the following independent cases:

Assuming the family home is

Exclusive property Common property Exclusive Property
of the decedent of the spouses of the surviving spouse

Value of family home P 17,000,000 P 17,000,000 P 17,000,000

Multiply by % owned 100% 50% 0%
Decedent’s interest P 17,000,000 P 8,500,000 P 0
Limit P 10,000,000 P 10,000,000 P 0

Family home deduction P 10,000,000 P 8,500,000 P 0

Illustration 2
Mr. Ti died leaving a family home consisting of a lot valued at P 4,000,000 and a house value at P 11,000,000.

Required:
Determine the amount to be included in gross estate and the deductible family home under each of the following
independent cases:
Case 1 Case 2 Case 3
Lot Exclusive of Mr. Ti Common property Common property
House Common property Exclusive of Mrs. Ti Exclusive of Mr. Ti

Solution:
1. Case 1
Gross estate % owned Family home
Lot - SP - decedent P 4,000,000 100% P 4,000,000
House - CP 11,000,000 50% 5,500,000
To be reported in gross estate P 15,000,000
Decedent’s Interest P 9,500,000
Limit P 10,000,000
Deductible family home P 9,500,000

2. Case 2
Gross estate % owned Family home
Lot - SP - decedent P 4,000,000 50% P 2,000,000
House - CP - surviving spouse 0 0% 0
To be reported in gross estate P 4,000,000
Decedent’s Interest P 2,000,000
Limit P 10,000,000
Deductible family home P 2,000,000

3. Case 3
Gross estate % owned Family home
Lot - SP - decedent P 4,000,000 50% P 2,000,000
House - CP 11,000,000 100% 11,000,000
To be reported in gross estate P 15,000,000
Decedent’s Interest P 13,000,000
Limit P 10,000,000
Deductible family home P 10,000,000

STANDARD DEDUCTION
➢ A deduction in the amount of 5,000,000 shall be allowed as an addition deduction without the need of
substantiation. The full amount of shall be allowed as deduction for the benefit of the decedent.

➢ In order to simplify tax administration of the estate tax, the TRAIN Law adjusted the standard deduction of
P1M under the NIRC to P5M in lieu of the funeral expense, judicial expense and medical expense which were
previously deductible in the old law. In view of this, these expense deductions are no longer allowed under
the TRAIN law. They are deemed included in the increase in the standard deductions.

BENEFITS UNDER RA 4917

➢ Pursuant to RA 4917 which took effect on June 17, 1967, the retirement benefit or termination benefit received
by employees of private firms is not subject to attachment, levy, execution, or any tax whatsoever. Pursuant
to the NIRC which took effect on January 1, 1998, any amount received by the heirs from the decedent’s
employer as a consequence of the death of the decedent-employee in accordance with Republic Act No. 4917
is allowed as a deduction provided that the amount of the separation benefit is included as part of the gross
estate of the decedent.

Illustration 1
In 2018, Mr. W resigned from his employment and received a P 2,000,000 retirement pay from his employer's private
benefit plan. Mr. W invested P 1,000,000 in the stock market and use the other P 1,000,000 to purchase a car. In 2019,
Mr. W died leaving the car which now has a value of P 800,000 and his investments with a value of P 1,500,000.
The amount to be included in gross estate shall be:
Car P 800,000
Investment in stocks 1,500,000
Total inclusion in gross estate P 2,300,000

The deduction for benefits under RA 4917 shall be nil. The NIRC qualified the exemption of benefits received as a consequence
of death (i.e., death benefits) rather than retirement or termination benefit received during the lifetime of the decedent.

Illustration 2
Mr. H, a bachelor, died in a car accident. His heirs received a P 1,500,000 termination pay from his employer on
account from of Mr. H’s death.

The P1,500,000 termination pay shall be included in gross estate and shall likewise be presented as a deduction against gross
estate.

SHARE OF THE SURVIVING SPOUSE

➢ The share of the surviving spouse is one-half of the net conjugal or community properties of the spouses.
Needless to say, only married decedents have this deduction. After deducting the allowable deductions
appertaining to the conjugal or community properties included in the gross estate, the share of the surviving
spouse must be removed to ensure that only the decedent’s interest in the estate is taxed (RR2-2003).

Illustration
Using the same information in the illustration 2 of the vanishing deduction, the share of the surviving spouse shall be
computed as follows:
Exclusive Communal Total
Gross estate P 3,000,000 P 12,000,000 P 15,000,000
Less:
Ordinary deductions
- Casualty losses - 400,000 400,000
- Claims against the estate - 800,000 800,000
- Unpaid mortgage 600,000 1,000,000 1,600,000
- Transfer for public use 1,000,000 - 1,000,000
- Vanishing Deduction 857,600 1,706,666 2,564,266
Total P 542,400 P 8,093,334 P 8,635,734
Less: share of surviving spouse ÷ 2 4,046,667

Correction to audio recording :7,960,000 to 8,093,334

Share of the surviving spouse from 3,980,000 to 4,046,667

Illustration
A married decedent died with the following gross estate and allowable deductions:

Separate properties of the decedent P 1,200,000

Common property 3,800,000
Gross estate P 5,000,000

Actual state expenses and deductions:

Funeral expenses P 500,000
Judicial or estate administration expenses 400,000
Claim against the estate - separate properties 400,000
Claim against the estate - common properties 600,000
Unpaid mortgage on separate properties 100,000
Unpaid mortgage on common properties 400,000
Loss of common properties 150,000
Transfer for public use 100,000
Vanishing deduction on common properties 200,000

The statutory deduction for surviving spouse

The statutory deduction for the share of the surviving spouse shall be computed using estate tax rules as follows:

Exclusive Communal Total

Gross estate P 1,200,000 P 3,800,000 P 5,000,000
Less: ordinary deductions
Claims against the estate 400,000 600,000 1,000,000
Mortgage 100,000 400,000 500,000
Loss 150,000 150,000
Transfer for public use 100,000 100,000
Vanishing deduction - 200,000 200,000
Net estate before special deduction P 600,000 P 2,450,000 P 3,050,000
Divide by: 2
Share of surviving spouse P 1,225,000

Benefit under RA 4917 is commonly treated as a special deduction because it is normally deductible by citizens or
residents and is at least likely to be availed of by non-resident aliens.

Note on the classification of benefits under RQ4917

Death benefit under RQ 4917 may be indicated as an ordinary deduction or a special deduction under the category
“Others” in either classification.

This can be made without defeating the law. Regardless of the classification used for RA 4917 death benefits. The
share of surviving spouse us adjust to ensure that only the interest of the decedent is taxed as declared under RR2-
2003.

If the decedent is single, there is no tax issue on which classification to use. In the case of married decedents, however,
the following approach must be followed:
• If RA 4917 death benefit is classified as an ordinary deduction
the amount of benefits must be included in conjugal or communal properties of the spouses but is
removed in full under ordinary deductions.
• If RA 4917 death benefit is classified as a special deduction
The amount of the benefits must be included is conjugal or community properties of the spouses.
However, the deduction for benefits under RA 4917 shall only be one-half of its value. This is
because the other half is deducted through the deduction category, “Share of the surviving spouse.”

Illustration 1: RA 4917 death benefits as an ordinary deduction

Assume a married decedent died with RA 4917 death benefits of P800,000, a family home of P1,200,000, other
conjugal properties of P2,800,000 and P7,500,000 exclusive properties. Losses, indebtedness, and taxes chargeable
against conjugal properties were P700,000.
The net taxable estate shall be determined as follows:
Exclusive Conjugal Total
Family home P P 1,200,000 P 1,200,000
Benefits under RA 4917 800,000 800,000
Other Properties 7,500,000 2,800,000 10,300,000
Gross Estate P7, 500,000 P 4,800,000 P 12,300,000
Less Ordinary Deductions
LIT 700,000 700,000
Benefits under RA 4917(other) 800,000 800,000
Estate after deductions P7, 500,000 P 3,300,000 P 10,800,000
Less special deductions
Family home (P 1,200,000 x ½ since family home is conjugal) 600,000
Standard deduction 5,000,000
Net estate P 5,200,000
Less: Share of surviving spouse (3.3 m x ½) 1,650,000
NET TAXABLE ESTATE P3, 550,000

Illustration 2: RA 4917 death benefit as a special deduction

The taxable net estate shall be determined as follows:

Exclusive Conjugal Total

Family home P P 1,200,000 P 1,200,000
Benefits under RA 4917 800,000 800,000
Other Properties 7,500,000 2,800,000 10,300,000
Gross Estate P7, 500,000 P 4,800,000 P 12,300,000
Less Ordinary Deductions
LIT 700,000 700,000
Estate after deductions P 7,500,000 P 4.100,000 P 11,600,000
Less special deductions
Benefits under RA 4917 (800K x 50%) 400,000
Family home (P 1,200,000 x ½ since family home is conjugal) 600,000
Standard deduction 5,000,000
Net estate P 5,600 ,000
Less: Share of surviving spouse (4.1 m x ½) 2,050,000
NET TAXABLE ESTATE P 3,550,000

Both treatments results in the same net taxable state. Despite this, Benefits under RA 4917 is best presented as part
of special deduction because it is a deduction prescribed by special law.

RULES ON CLAIMABLE DEDUCTIONS PER DECENDENT CLASSIFICATION

Resident or citizen* Non-resident alien

Ordinary deduction ✓ ✓
Special deduction ✓ None, except
standard deduction
Share of surviving spouse ✓ ✓
*includes resident citizen, non-resident citizen and resident alien

DEDUCTION ALLOWED TO NON-RESIDENT ALIEN DECENDENTS

It should be emphasized that non-resident aliens cannot claim the special deductions. Non-resident aliens can claim
only the following deductions:
1.Prorated Losses, Indebtedness, and Taxes (LIT)
2. Property previously taxes (Vanishing Deductions)
3. Transfer for public purpose
4. Share of the surviving spouse
5. Standard deduction

Prorated LIT

The claimable deduction amounts of LIT of non-resident aliens are prorated as follows:

Philippine gross estate

----------------------------- X Losses, indebtedness, and Taxes
World gross estate

Illustration
An unmarried non-resident alien decedent died with the following gross estate and deductions details:

Philippines Abroad Total

Family home P- P 1,200,000 P 1,200.000
Other properties estate 4,000,000 4,800,000 8,800,000
Gross Estate P4,000,000 P 6,000,000 P 10,000,000

Philippines Abroad Total

Claims against the estate **300,000 2,100,000 2,400,000
Losses on properties 400,000 800,000 1,200,000
Transfer to public use 300,000 400,000 700,000
Note: Peso equivalents **P150,000 is unsupported.

While relaxing the matching rule with respect to deductions abroad, the total deductible amount of LIT items must first
be determined in the usual way similar to citizens:

Claims against the estate (P300k -P150K + 2.1M) P 2,250,000

Losses on properties (P400k+P800K) 1,200,000
Total World LIT P 3,450,000

The Philippine gross estate ratio shall be computed as follows:

Philippine Gross Estate P 4,000,000

------------------------- = -------------- = 40%
World Gross Estate P 10,000,000

The deductible amount of each LIT to be presented in the estate tax return shall be computed as:

Claims against the estate (P2,250,000 x 40%) P 900,000

Losses on properties (P1,200,000 x 40%) 480,000
Total Deductible LIT P 1,660,000
Property previously taxed (Vanishing Deductions)
The same vanishing deductions shall be deductible provided that the property subject to vanishing deductions is
included as part of gross estate. In other words, the property subject to vanishing deduction must be within the
Philippines at the date of death.

Illustration
A non-resident alien died with Philippine gross estate of P4M and foreign gross estate of P6M. The computed allowable
pro-rated LIT against Philippine estate is P1,660,000. The Philippine gross estate included a P1M property which was
inherited 2 years ago when its value was worth P1.2M. The foreign gross state also included a P2M property which
was intertied 3 years ago when it was valued at P2.5M

The vanishing deduction of the non-resident alien decedent shall be computed as:

Initial value (P1M or P1.2M whichever is lower) P 1,000,000

Less: Indebtedness paid 0
Initial basis P 1,000,000

Initial basis P 1,000,000

Less: Prorated deduction
(Initial basis/ Philippine GE) x (LIT + TFPP)
[(P1M/4M) x P 1,660,000) 415,000
Final basis P 585,000
Multiply by: Vanishing percentage for up to 2 years 80%
Vanishing deductions P 468,000

Note: No vanishing deduction can be claimed with respected to the properties located abroad because these are not
included in the Philippine gross estate.

Transfer for public Purpose

Transfer for public purpose by non-resident alien decedents are deductible only if the properties being transferred to
the Philippine government is part of the gross estate. It must be situated In the Philippines at the time of transfer.

Share of the surviving spouse

The deductible share of the surviving spouse of a non-resident alien decedent shall be computed out of Philippine
conjugal or communal properties using the same procedures as previously discussed.

Standard Deductions
In view of the removal of the prorated funeral and judicial expense for non-resident alien decedents, the TRAIN law
allows a standard deduction of P500,000 for non-residents.

Illustration
A non-resident alien died leaving the following gross estate:

Philippines Abroad Total

Exclusive property P 3,000,000 P 10,000,000 P 13,000,000
Communal property 7,000,000 13,000,000 20,000,000
Total Gross Estate P 10,000,000 P 23,000,000 P 33,000,000
Prorated LIT P 1,200,000 P 2,800,000 P 4,000,000
 Transfer to Philippine Government
Involving exclusive property 600,000 800,000 1,400,000
Vanishing deduction on communal property 400,000 400,000

The share of the surviving spouse and the net taxable of the non-resident alien decedent shall be computed as:

Exclusive Communal Total

Gross Estate P 3,000,000 P 7,000,000 P 10,000,000
Less: Deductions
Prorated LIT 1,200,000 1,200,000
Transfer for public use 600,000 600,000
Vanishing Deduction 400,000 400,000
Net estate after deduction P 2,400,000 P 5,400,000 P 7,800,000
Less: Standard deduction 500,000
Net estate P 7,300,000
Less: Share of the surviving spouse (P5,400,000/2) 2,700,000
TAXABLE NET ESTATE P 4,600,000

Additional requirements on Deductions of non-resident Alien

No deduction shall be allowed in the case of a non-resident alien decedent, unless the executor, administrator, or
anyone of the heirs, as the case may be, includes in the return the value at the time of the decedent’s death that part
of his gross estate not situated in the Philippines.

SUMMARY OF DEDUCTION RULES

Residents or Citizens Non-resident aliens
Losses YES
Claims against the estate YES Pro-rated
Indebtedness YES amount.
Taxes YES
Transfer for public use YES YES
Vanishing deductions YES YES
Family home YES NO
Standard deductions YES YES
Benefits under RA 4917 YES NO
Share of the surviving spouse YES YES