GROSS ESTATE

ALLOWABLE DEDUCTIONS

Resident Citizen, Non-Resident Citizen, and Resident Alien Decedents.

The following are the allowable deductions of a resident citizen, a non-resident citizen
or a resident alien decedent shall include the following:
1) Standard Deductions - an amount equivalent to Five Million pesos (P 5, 000,
000)

2) Claims Against the Estate. A claim against the estate is an obligation

contracted by the decedent when he was alive which he should have settled
or paid during his lifetime. But because he died without paying this
obligation and because said obligation is not terminated by his death, his
estate is being allowed to deduct the claim so that his creditor, in turn, may
collect from the estate.

Requisites for Deductibility

a. The liability represents a personal obligation of the deceased existing at the

time of his death, except unpaid obligations incurred incident to his death
such as unpaid funeral expenses and unpaid medical expenses;
b. The liability was contracted in good faith and for adequate and full
consideration in money or money’s worth;
c. The claim must be a debt or claim which is valid in law and enforceable in
court;
d. The indebtedness must not have been condoned by the creditor or the
action to collect from the decedent must not have prescribed;

Provided, however that at the time the indebtedness was incurred the debt
instrument was duly notarized and, if the loan was contracted within three (3)
years before the death of the decedent, the administrator or executor shall
submit a statement showing the disposition of the proceeds of the loan.

3) Claims Against Insolvent Persons. The decedent-creditor during his

lifetime must have lent another person-debtor a certain sum of money. Here,
the creditor dies unable to collect from the debtor because of the debtor’s
insolvency. Although the creditor’s death does not extinguish the right of his
estate to collect from his debtor, the estate is being allowed a deduction for
the claim because of the hopelessness of collection from the debtor by the
estate.

For claims of the deceased against insolvent persons to be deductible, the

full amount of the claim must be
included in the gross estate. The incapacity of
the debtors to pay their debts due to insolvency must be proven. The amount
of receivable which is uncollectibel may be allowed as a deduction from the
gross estate.
 Example. Mr. Dizon’s estate has a claim of P 600,000 agains Mr. Magno, a
debtor declared insolvent. Mr. Magno’s assets are worth P3M while his
liabilities P9M.
The full amount of the claim of P600, 000 must be included in the gross
estate. The proportionate amount of P 200, 000 (P600, 000 x P3M/P9M) is
still collectible. The amount deductible from the gross estate is P400, 000
(P600, 000 - P200, 000).

4) Unpaid Mortgages. Unpaid mortgages exists when the decedent leaves

property encumbered by mortgage. For unpaid mortgage to be deductible,
the fair market value of the property mortgaged must be included in the gross
estate in full. The unpaid mortgage deductible shall be to the extent that it
was contracted bona fide and for an adequate and full consideration in money
or money’s worth.

In case unpaid mortgage payable is being claimed by the estate, verification

must be made as to who was the beneficiary of the loan proceeds:
1. If the loan is found to be merely an accomodation loan where the loan proceeds
went to another person, the value of the unpaid loan must be included as a receivable
of the estate.
2. If there is a legal impediment to recognize the same as receivable of the estate, said
unpaid obligation/mortgage payable shall not be allowed as a deduction from the
gross estate.
3. In all instances, the mortgaged property, to the extent of the decedent’s interest
therein, should always form part of the gross taxable estate.

5) Property Previously Taxed (Vanishing Deduction). This deduction is being

allowed to lessen the impact of successive taxation of the same property
within a very short period due to the death of the decedent-transferee.
Requisites for Deductibility
1. Present decedent must have died within five (5) years from date of death of prior
decedent.
2. The property with respect to which the deduction is claimed must have formed part
of the gross estate situated in the Philippines of the prior decedent.
3. The property must be identified as the same property received from prior decedent
4. The estate taxes o the transmission of the prior estate must have been finall
determined and paid.
5. No vanishing deduction on the property was allowed to the prior estate.

Limitations on Amount Deductible

1. Value of the property. The deduction is limited by the value of the property
previously taxed or the aggregate value of such property if more than one itme, as
finally determined for the purpose of the prior estate tax or the value of such property
in present decedent’s gross estate, whichever is lower;
2. Deduction for mortgage or other lien. The initial value in no. 1 shall be reduced
by the total amount paid, if any, by the present decedent on any mortgage or other lien
on the property where a deduction was allowed, by reason of the payment, of such
mortgage or other lien from the gross estate of the prior decedent in determining the
estate tax of the prior decedent.
3. Deductions for expenses, etc. The value as reduced in no. 2 shall be further
reduced by an amount which bears the same ratio to the amounts allowed as
deductions for claims against the estate, claims against insolvent person, unpaid
mortgage, and transfers for public use as the amount otherwise deductible for property
previously taxed bears to the value of the decedent’s gross estate.
4. Percentage of deductions. The vanishing deduction shall be the value (final basis)
in no. 3 multiplied by the following percentage of deduction:

Transfer But not more

Percentage more than than
100% One year
80% One year Two years
60% Two years Three years
40% Three years Four years
20% Four years Five years

Step-by-step computation:
1. Value taken of PPT xxx
Less: Mortgage debt (or other lien paid, if any) xxx (1st deduction)
Initial basis xxx
===
2. Initial basis x Claims against the estate, etc. = (2nd deduction)
Value of gross and transfers for public
estate of present purposes
decedent
3. Initial basis xxx
Less: 2nd deduction xxx
Final basis xxx
Multiply by percentage of deduction x%
Vanishing deduction xxx
====
Example:

On September 10, 2017, Mr. Rayco died leaving his house and lot and Van to his only
son, Junior who is still a bachelor. The estate tax corresponding to the transmission of
these property were paid. Following are the relevant data:
FMV at the time of death Unpaid mortgage at the time of death
Property Rayco’s Junior’s Rayco’s Junior’s
House & lot P 8, 000, 000 P 9, 800, 000
P 600, 000 P 200, 000
Van 1, 900, 000 800, 000

On July 6, 2020, Junior died. His gross estate including the house & lot and van were
declared at P 15M while deductions (for claims against the estate, claims against
insolvent persons, unpaid mortgage, and transfers for public purpose) amounted to
P 2.5 M.

The vanishing deduction is computed as follows:

1. Value taken of PPT ( P 8,000,000+P800,000) P 8, 800, 000
Less Mortgage debt or other lien paid (1st deduction) 400, 000
 Initial basis P 8, 400, 000

2. P 8, 400, 000 x P 2, 500, 000 = P 1, 400, 000 (2nd

deduction)
P 15, 000, 000

3. Initial basis P 8, 400, 000

Less 2nd deduction 1, 400, 000
Final basis P 7, 000, 000
Multiply by percentage of deduction* 60%
Vanishing deduction P 4, 200, 000
==========
* Period between deaths is more than 2 years but not more than 3 years ( 2 years 9
months and 26 days)

6) Transfers for Public Purpose. There shall be allowed as deduction from

gross estate the amount of all bequests, legacies, devises or transfers to or fot
the use of the Government of the Republic of the Phiippines, or any political
subdivision thereof, for exclusive public purposes.

7) Family Home. The amount deductible from the gross estate as family home
shall be the current fair market value of the decedent’s family home at the
time of death. However, if the said current fair market value exceeds ten
million pesos (P10, 000, 000), the excess shall be subject to estate tax.

Family home is the dwelling house, including the land on which it is

situated, where the husband and wife, or
a head of the family, and members of their family reside, as certified to 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 as long as any of its
beneficiaries actually resides therein (Arts. 152 and 153, Family Code).

Beneficiaries of a Family Home

1. The husband and wife, or the head of a family; and
2. Their parents, ascendants, descendants including legally adopted children, brothers
and sisters, whether the relationship be legitimate or illegitimate, who are living in the
family home and who depend upon the head of the family for legal support.

Requisites for Deductibility

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 total value of the home must included as part of the gross estate of the
decedent; and
3. Allowable deduction must be in an amount equivalent to the current fair market
value of the family home as declared or included in the gross estate, or the extent of
the decedent’s interest (whether conjugal/ community or exclusive property),
whichever is lower but not exceeding P10, 000, 000.
 8) Amount Received by Heirs Under R.A. 4917. Any amount received by the
heirs from the decedent’s employer as a consequence of the death of the
decedent-employee in accordance with the Republic Act 4917 shall be
deductible. Such amount must be included in the gross estate of the
decedent.

9) Net Share of the Surviving Spouse in the Conjugal Property. After

deducting the allowable deductions pertaining to the conjugal or community
properties included in the gross estate, the one-half share of the surviving
spouse must be removed to ensure that only the decedent’s interest in the
estate is taxed.

10) Tax Credit for Estate Taxes Paid to a Foreign Country

a) In General - The estate tax shall be credited with the amounts of any
estate tax imposed by the authority of a foreign country subject to the
following limitations:
i. The amount of the credit in respect to the tax paid to any country
shall not exceed the same proportion of the tax against which such
credit is taken, which the decedent’s net estate situated within such
country taxable for estate tax bears to his entire net estate.
ii. The total amount of the credit shall not exceed the same
proportionof the tax against which such credit is taken, which the
decedent’s net estate situated outside the Philippines taxable for
estate tax bears to his entire net estate.

Non - Resdient Alien Decedents

The estate of a non-resident alien decedent consists of property in the Philippines and
in other country or countries. For estate tax purposes, only his property in the
Philippines shall be considered in the gross estate computation. The estate is entitled
to the following deductions:
1. Standard Deduction. An amount equivalent to Five Hundred Thousand Pesos
(P 500, 000).

2. Claims against the estate, Claims against insolvent persons, and Unpaid
mortgage subject to limitation as follows:

Gross Estate, Philippines x World claims against the estate, = Deduction

Gross Estate, World claims against insolvent person, Allowed
unpaid mortgages

3. Property Previously Taxed. Vanishing deduction on property situated in the

Philippines.

4. Transfers for Public Use. There shall be allowed as deduction from gross estate
the amount of all bequests, legacies, devises or transfers to or fot the use of the
Government of the Republic of the Phiippines, or any political subdivision thereof, for
exclusive public purposes.