the tax. They are not considered in determining gross income. Tax exclusions Life Insurance Amount received by insured as return of premium Gifts, bequests and properties given through a will Compensation for injuries or sickness Income exempt under treaty Retirement benefits, pensions and gratuities Miscellaneous items Life insurance These are proceeds paid to beneficiaries upon the death of the insured which are not subject to tax. They are considered more as an indemnity rather as a gain or profits, and payments for injuries or sickness as they are compensatory in nature. They are not income. Tax treaty A tax treaty is a convention or agreement for the avoidance of double taxation and prevention of fiscal evasion of income taxes. As of June 2010, the Philippines has 37 effective tax treaties. The business profits of a resident of a Contracted State shall not be taxable in the Philippines, unless the enterprise of a resident of a Contracting State conducts business in the Philippines through a permanent establishment. Purpose A tax treaty is intended to promote international trade and investment by allocating taxing jurisdiction between the Contracting States A tax treaty is also intended to permit the Contracting States to better enforce their domestic laws to reduce tax evasion Retirement benefits, pensions and gratuities, Such exclusions under this category include: Retirement benefits under Republic Act 7641 or a reasonable private retirement plan Reasonable retirement benefit plan – this means a pension, gratuity, stock bonus or profit sharing plan maintained by an employer for the benefit of some or all of his officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the income of the fund be used for or be diverted to any purpose other than for the exclusive benefit of the said officials and employees. Termination leave pay – or commutation of leave credits, is given not only at the same time but also for the same policy considerations governing retirement benefits. Thus, not being part of the gross salary or income but a retirement benefit, terminal pay is not subject to income tax. Amount received by an official or employee from the employer due to separation from the service because of death, sickness or other physical disability or for any cause beyond the control of the official or employee. Social security benefits, retirement gratuities, pensions and other similar benefits received by resident or non‐resident citizens or resident aliens from foreign government agencies and other institutions, private or public. Payment of benefits to a resident person under the United States Veterans Administration. Benefits received from or enjoyed under the Social Security System. Benefits received from the GSIS, including retirement gratuity received by government officials and employees. Miscellaneous Income Derived by a Foreign Government Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by: Foreign governments Financing institutions owed, controlled, or enjoying refinancing from foreign governments International or regional financial institutions established by foreign governments Income Derived by the Philippine Government This is income derived from any public utility or from the exercise of any essential government function. It is also the income accruing to the government or to any of its political subdivision. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement The requirements for the income to be excluded are: The prizes and awards must be granted to athletes in local and international sports competitions and tournaments Sports competition or tournament held either in the Philippines or abroad Sports competition or tournament must be sanctioned by their national sports associations GSIS, SSS, Medicare and Other Contributions Retirement benefits, pensions, etc. received by government officials and employees from the GSIS and SSS in recognition for their services to the government and retirement benefits received by officials and employees of private firms under certain conditions. 13th Month Pay & Other Benefits Christmas bonus, 13th month pay, productivity incentives and other benefits received by officials and employees of public and private entities up to a maximum of P30,000. Gains from Sale of Bonds Gains from the sale or retirement of bonds or other certificates of indebtedness with a maturity of more than 5 years. Deductions Deductions are items or amounts which the law allows to be deducted under certain conditions from the gross income in order to arrive at taxable income. Deductions are different from exclusions because while deductions are included in the gross income, tax exclusions are not. Tax exclusions are not included in the income tax return unless specified. Additionally, deductions are different from tax exemptions. Tax exemptions are grants of immunity to a particular persons or corporations of a certain class, whereas tax deductions are applicable to all classes of taxpayers • The taxpayer seeking a deduction must point to some specific provisions of the statute authorizing the deduction • He must be able to prove that he is entitled to the deduction authorized or allowed Optional Standard Deductions Instead of itemized deductions, an individual, other than a resident alien, may elect a standard deduction. Such optional standard deduction shall be equal to 40% of the gross sales or gross receipts of resident individual taxpayers engaged in business or practice, or 40% of gross income for corporations. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed of the itemized deductions. Ordinary and necessary trade, business or professional expenses incurred during the taxable year Interest paid or incurred within the taxable year on indebtedness in relation with the taxpayer’s profession Taxes paid or incurred within the taxable year in connection with the taxpayer’s profession, trade or business Losses which are: • Sustained by taxpayer in connection with taxpayer’s trade • From sale or exchanges of capital assets • From wash sales of stock or securities. Wash sales refer to sales from stock that are purchased for a lower price than the original stock price. • Losses from wagering transactions Bad debts ascertained to be worthless and charged off during the taxable year Depreciation of properties used in trade or business Depletion of oil wells, gas wells, and mines –the amount of intangible exploration and drilling costs incurred by the taxpayer in petroleum and mining operations for non‐producing wells and/or mines Charitable contributions and other contributions paid or made within the taxable year for the use of the government of the Philippines or any of its agencies Research and development expenditures paid or incurred during the taxable year in connection with taxpayer’s trade, business or profession Pension Trusts refer to the amount transferred or paid by an employer maintaining a pension trust Premium payments on health and/or hospitalization insurance not exceeding P 2,400 or P200 per month, provided that the taxpayer availing of the said deduction has a family income of no more than P250,000 for the taxable year Free legal services exclusive of the 60‐hour mandatory legal aid services rendered to indigent litigants Resident Aliens Same deductions allowed to citizens. Non‐resident Aliens Non‐resident aliens engaged in trade or are entitled to the same deductions except for: • Taxes ‐ The deductions for taxes shall be allowed only if and to the extent that they are connected with income from the Philippines • Losses ‐ losses deductible shall be those actually sustained during the year incurred in business, trade or exercise of a profession conducted within the Philippines • Depreciation ‐ for the deterioration of property arising from its use in the business, trade or profession on properties located in the Philippines • Depletion of oil wells, gas wells, and mines –authorized only with respect to oil wells, gas wells, or mines located within the Philippines Citizens and resident aliens whose income is purely compensation income • They are allowed, however, personal and additional exemptions and deduction for premium payments on health and hospitalization insurance income Non‐resident aliens not engaged in trade or business in the Philippines Non‐resident aliens employed by regional or area headquarters and regional operating headquarters of multinational corporations, offshore banking units, or service contractors/ subcontractors engaged in petroleum operations in the Philippines Non‐resident foreign corporations Deductions allowed only to individual taxpayers • Personal exemptions • Additional exemptions • Premium payments on health and/or hospitalization insurance (only for individuals earning pure compensation income) Resident and Non‐resident citizens earning business or professional income Resident aliens Non‐residents Aliens Engaged in trade in the Philippines – entitled to personal exemptions equal to the exemptions allowed by the income tax law of the country of which he is a citizen or to citizens of the Philippines but not to exceed the amount fixed in the NIRC as exemption for citizens or residents of the Philippines Not engaged in trade – not allowed personal and additional exemptions Individual Taxpayer Amount allowable Single/ legally separated individual with no qualified dependents P 50,000 Head of family P 50,000 For each married individual * P 50,000 * In case of married individuals where only one of the spouses is deriving gross income, only the spouse who earns income shall be allowed personal exemptions A head of the family is an unmarried or legally separated individual with one or both parents, or with one or more brothers or sisters, or one or more legitimate, recognized natural or legally adopted children living with and dependent upon him for their chief support. (Section 35, NIRC) For each qualified dependent, a P 25,000 additional exemption can be claimed, but only up to 4 qualified dependents. Additional exemption shall be claimed by only one of the spouses in the case of married individuals.
The additional exemption can be claimed by
the following: • The husband who is deemed head of the family, unless he explicitly waives his right in favor of his wife • The spouse who has custody of the child or children, in case legally separated • The individuals considered as Head of the Family supporting a qualified dependent