TAX-601:

INCOME TAX
(INDIVIDUALS, ESTATES
AND TRUSTS)
BY ABAPO
 1. CLASSIFICATION OF INDIVIDUALS
a. Citizens

1. Those who are citizens of the Philippines at the time of the adoption of the Constitution (on
February 2, 1987);

2. Those whose fathers or mothers are citizens of the Philippines;

3. Those born before January 17, 1973 of Filipino mothers who elect Philippine citizenship upon
reaching the age of majority;

4. Those who are naturalized in accordance with law.

 CITIZENS
1. Resident citizen
a) A citizen of the Philippines residing therein.

2. Non-resident citizen

a) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the
fact of his physical presence abroad with a definite intention to reside therein;

b) A citizen of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis;

c) A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time during the
taxable year;
 CITIZENS
Overseas Contract Worker (OCW) or Overseas Filipino Worker (OFW)

a. Refers to Filipino citizens in foreign countries who are physically present in a foreign country
as a consequence of their employment in that country;

b. Commonly referred to as OFWs;

c. Their salaries and wages are paid by an employer abroad and is not borne by an entity or
person in the Philippines;

d. Must be duly registered as such with the Philippine Overseas Employment Administration
(POEA) with valid Overseas Employment Certificate (OEC).
 CITIZENS
Tax Treatment under the 1997 Tax Code, as amended

An individual citizen of the Philippines who is working and deriving income from abroad as
an OCW is taxable only on income from sources within the Philippines;

A seaman who is a citizen of the Philippines and who receives compensation for services
rendered abroad as a member of the complement of a vessel engaged exclusively in
international trade shall be treated as an OCW;

An OCW or OFW’s income arising out of his overseas employment is exempt from income
tax.
CLASSIFICATION OF INDIVIDUALS
b. Aliens

Individuals who are not Filipinos.

1) Resident alien;
2) Non-resident alien doing business in the Philippines;
3) Non-resident alien not doing business in the Philippines.
 ALIENS
1. Resident alien

An individual whose residence is within the Philippines and who is not a citizen thereof.

1) An alien who lives in the Philippines with no definite intention as to his stay;

2) One who comes to the Philippines for a definite purpose which in its nature would
require an extended stay and to that end makes his home temporarily in the Philippines,
although it may be his intention at all times to return to his domicile abroad;

3) An alien who has acquired residence in the Philippines retains his status as such until he
abandons the same and actually departs from the Philippines.
 ALIENS
2. Non-Resident alien

An individual whose residence is not within the Philippines and who is not a citizen thereon.

1) One who comes to the Philippines for a definite purpose which in its nature may be promptly
accomplished

2) A non-resident alien individual who shall come to the Philippines and stay therein for an
aggregate period of more than 180 days during any calendar year shall be deemed a “non-
resident alien doing business in the Philippines.”
 2. TAXABLE INCOME
TAXABLE INCOME DEFINED

The term ‘taxable income’ means the pertinent items of gross income specified in
the Tax Code, less deductions if any, authorized for such types of income by the
Tax Code or other special laws.
3. TAX BASE AND TAX RATE
4. RATES OF TAX ON TAXABLE
INCOME OF INDIVIDUAL
 C. MARRIED INDIVIDUALS

1) Joint return of husband and wife

Married individuals, whether citizens, resident or nonresident aliens, who do not derive
income purely from compensation, shall file a return for the taxable year to include the
income of both spouses, but where it is impracticable for the spouses to file one return,
each spouse may file a separate return of income but the returns so filed shall be
consolidated by the Bureau for purposes of verification for the taxable year. [Sec. 51 (D)]

2) Separate computation of income tax

For married individuals, the husband and wife, subjectto theprovisionofSection51(D)hereof,

shall compute separately their individual income tax based on their respective total
taxable income.
 C. MARRIED INDIVIDUALS

3) Certain income to be divided equally

If any income cannot be definitely attributed to or identified as income exclusively earned

or realized by eitherofthe spouses,thesame shall be divided equally between the spouses
forthe purpose of determining their respective taxable income.
D.MINIMUM WAGE EARNERS
1) Definition
The term “minimum wage earner” shall refer to a worker in the private sector paid the
statutory minimum wage, or to an employee in the public sector with compensation
income of not more than the statutory minimum wage in the non-agricultural sector where
he/she is assigned.

2) Exempt from income tax

Minimum wage earners shallbe exempt from the payment of income tax on their taxable
income.

The holiday pay, overtime pay, night shift differential pay, and hazard pay received by
such minimum wage earners shall likewise be exempt from income tax.
D.MINIMUM WAGE EARNERS
For purposes of these regulations, hazard pay shall mean the amount paid by the
employer to MWEs who were actually assigned to danger or strife-torn areas, disease-
infested places, or in distressed or isolated stations and camps, which expose them to
greatdanger or contagion or peril to life.

Any hazard pay paid to MWEs which does not satisfy the above criteria is deemed subject
to income tax and consequently, withholding tax on the said hazard pay.
E.INDIVIDUALS EARNING PURELY
COMPENSATION INCOME
Individuals earning purely compensation income shall be taxed based on the graduated
income tax rates above.

F. SELF-EMPLOYED INDIVIDUALS
AND/OR PROFESSIONALS
Self-employed individuals and/or professionals shall have the options to be taxed at:

a. graduated income tax rate on taxable income or

b. an eight percent (8%) tax on gross sales or gross receipts and other non-operating income
in excess of Two hundred fifty thousand pesos (P250,000) in lieu of the graduated income tax
rates and the percentage tax under Section 116 of this Code.
G.MIXED INCOME EARNERS
G.MIXED INCOME EARNERS
5. OPTIONAL STANDARD DEDUCTIONS
(OSD) FOR INDIVIDUAL TAXPAYERS
a. In lieu of the deductions allowed (itemized), an individual subject to tax under Section 24,
other than a nonresident alien, may elect a standarddeduction inanamountnot exceeding
forty percent(40%) of his gross sales or gross receipts, as the casemay be.

b. Unless the taxpayer signifies in his return his intention to elect the optional standard
deduction, he shall be considered as having availed himself of the itemized deductions
allowed.

c. An individual who isentitledto and claimed forthe optional standard deduction shall not be
required to submit with his tax return such financial statements otherwise required underthe
Tax Code. d. The said individual shall keep such records pertaining to his gross sales or gross
receipts
6. EXERCISES
6. EXERCISES
6. EXERCISES
6. EXERCISES
6. EXERCISES
e. In 2020, Mr. MAG, a Financial Comptroller of JAB Company, earned annual compensation of
₱1,500,000, inclusive of 13th month and other benefits in the amount of ₱120,000 but net of mandatory
contributions to SSS and Philhealth. Aside from employment income, he owns a convenience store, with
gross sales of ₱2,400,000. His cost of sales and operating expenses are ₱1,000,000 and ₱600,000,
respectively, and with non-operating income of ₱100,000.
Questions:
1. How much is his tax due for 2020 if he opted to be taxed at 8% income tax rate of his gross sales for
his income from business?
2. How much is his income tax due for 2020 if he did not opt for the 8% income tax based on gross
sales/receipts and other non- operating income?
3. How much is the percentage tax 2020 if he did not opt for the 8% income tax based on gross
sales/receipts and other nonoperating income?
7. ESTATE AND TRUST
a. Definition of estate
Estate refers to the mass of all property, rights and obligations of a person which are not
extinguished by his death.

b. Definition of trust
Trust is a right on property, real or personal, held by one party for the benefit of another
8. IMPORTANT POINTERS ON
ESTATES AND TRUSTS
a. Estate as a taxpayer
An estate is a taxpayer if it is under settlement or administration.

b. Trust as a taxpayer
1) A trust is a taxpayer if under the terms of the trust the fiduciary must accumulate the
income.
2) A trust is a taxpayer if under the terms of the trust the fiduciary may accumulate or
distribute the income, in his discretion.
8. IMPORTANT POINTERS ON
ESTATES AND TRUSTS
c. When is the income of the trust taxable to the grantor?
1) If under the term of the trust the title to any part of the corpus or principal of the trust
may be revested to the grantor, the income of the part of the corpus or principal shall be
taxable to the grantor.
2) If under the term of the trust the income of the trust shall be applied for the benefit of
the grantor, the income that shall be applied for the benefit of the grantor shall be taxable to
the grantor.

d. Treatment of income distribution of the year’s income to heir or Beneficiary When an estate
or a trust is a taxpayer, a distribution of the year’s income to an heir or beneficiary is:
1) A special item of deduction for the estate/trust;
2) A special item of income to the heir/beneficiary.
8. IMPORTANT POINTERS ON
ESTATES AND TRUSTS
e. Computation of taxable income of the estate or trust
9. SEVERAL TRUSTS WITH A COMMON
GRANTOR AND A COMMON BENEFICIARY
a. Filing of separate returns
A separate return will have to be filed for each trust by the respective trustee or fiduciary.

b. Consolidation of the separate returns

The separate returns filed by the different fiduciaries shall be consolidated in the BIR.

c. Consolidated income tax

An income tax shall be computed on the consolidated income.

d. Apportionment of the consolidated income tax to the different trusts

The tax computed on the consolidated income shall be apportioned to the different trusts,
such that each trust shall have a share in the income tax on consolidated income. The
format of computation follows: Taxable income of the trust x Consolidated income tax
Taxable income of all trusts
9. SEVERAL TRUSTS WITH A COMMON
GRANTOR AND A COMMON BENEFICIARY
e. Tax payable of each trust
b. Mr. Sixto Cruz IV, a rich businessman, established on December 2019 a trust for the benefit
of his son Sixto Cruz V, 18 years old, single. He transferred to the trust two (2) income
producing properties with the following gross rentals: Vacant lot leased for P600,000
annually, gross of withholding tax Office building with monthly rental income of P25,000,
gross of withholding tax The appointed trustee was Mr. Osmundo de la Cruz. During the year
2020, ordinary trust expenses amounted to P350,000 and income distributed to the
beneficiary amounted to P150,000. The beneficiary has gross sales from his trading business
amounting to P500,000 and business expenses totaling P100,000.

Compute the taxable net income of the:

1) Trust using optional standard deduction.

2) Beneficiary using itemized deduction.
10. INCOME TAX RETURNS (INDIVIDUALS,
ESTATES AND TRUSTS)
a. Required to File

The following individuals are required to file an income tax return:

(a) Every Filipino citizen residing in the Philippines;
(b) Every Filipino citizen residing outside the Philippines, on his income from sources within the
Philippines;
(c) Every alien residing in the Philippines, on income derived from sources within the
Philippines; and
(d) Every nonresident alien engaged in trade or business or in the exercise of profession in the
Philippines.
10. INCOME TAX RETURNS (INDIVIDUALS,
ESTATES AND TRUSTS)
b. Contents of ITR

The income tax return (ITR) shall consist of a maximum of four (4) pages in paper form or
electronic form,and shall only contain thefollowing information:

(A) Personal profile and information;

(B) Total gross sales, receipts or income from compensationfor servicesrendered, conduct
oftrade or business or the exercise of a profession, except income subject to final tax as
provided under this Code;
(C) Allowable deductions under this Code;
(D) Taxable income as defined inSection 31of this Code;and (E) Income tax due and payable.
10. INCOME TAX RETURNS (INDIVIDUALS,
ESTATES AND TRUSTS)
c. Substituted Filing of IncomeTax Returns

Individual taxpayers shallnotbe requiredto file an annual income tax return if:

a. receiving purely compensation income, regardless of amount,

b. from only one employer in the Philippines for the calendar year,
c. the income tax of which has beenwithheldcorrectlybythesaidemployer(taxdue equals tax
withheld).

The certificate of withholding filed by the respective employers, duly stamped ‘received’ by
the BIR,shallbetantamount tothesubstitutedfilingofincometaxreturnsbysaid employees.
10. INCOME TAX RETURNS (INDIVIDUALS,
ESTATES AND TRUSTS)
d. Where to File

Except in cases where the Commissioner otherwise permits, the return shall be filed with

a. an authorized agent bank,

b. Revenue District Officer,
c. Collection Agent or duly authorized Treasurer of the city or municipality in which such
person has his legal residence or principal place of business in the Philippines, or
d. if there be no legal residence or place of business in the Philippines, with the Office of the
Commissioner.
10. INCOME TAX RETURNS (INDIVIDUALS,
ESTATES AND TRUSTS)
e. When to File
11. EXERCISES
12. EXERCISES
1) An employee receiving daily compensation in the amount of P2,500, net of mandatory
contributions
12. EXERCISES
2) An employee receiving weekly compensation in the of P9,500, net of mandatory
contributions.
12. EXERCISES
3) An employee receiving semi-monthly compensation in the amount of P15,500, net of
mandatory contributions.
12. EXERCISES
4) An employee receiving monthly compensation in the amount of P170,500, with
supplemental income of P5,000, net of mandatory contributions.
STEPS IN THE USE OF THE WITHHOLDING TAX
TABLE
1. Determine the total amount of monetary and non-monetary compensation paid to an
employee for the payroll period segregating non-taxable benefits and mandatory
contributions.

2. Use the appropriate the table above for the applicable payroll period.

3. Determine the compensation range of the employee and apply the applicable tax rates
prescribed thereon.

4. Compute the withholding tax due by adding the tax predetermined in the compensation
range indicated on the column used and the tax on the excess of the total compensation over
the minimum of the compensation range.