You are on page 1of 13

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS

)
SUGGESTED ANSWERS

127

Chapter 14: Income Taxes of Estates & Trusts

CHAPTER 14

INCOME TAXES OF ESTATES & TRUSTS
Problem 14 – 1 TRUE OR FALSE
1. False – P20,000
2. True
3. True
4. True
5. True
6. True
7. False – It shall be in writing either as trust inter-vivos or through a will.
8. False – A trustor is the person who establishes the trust, not the trustee.
9. True
10. True
11. True
12. True
Problem 14 – 2 TRUE OR FALSE
1. False – A taxpayer is required to file ITR regardless of the result of business whether
there is income or loss; hence, the ITR of irrevocable trust should be filed if its income is
P20,000 and below.
2. True
3. True
4. True
5. False – The income is taxable.
6. True
7. True
8. False – special deduction related to amount distributed to beneficiary is not allowed
when a trust is administered in a foreign country. [Sec. 61 (C), NIRC]
9. True
10. False – Since the trusts are irrevocable, their income should not be combined with the
income of the trustor.
Problem 14 – 3
1. B
2. C
3. A
4. D
5. B
6. A
7. A
8. B
9. D
10. C
11. C

000 because the income of Mathai before his death could deduct the basic personal exemption of P50. if is to be assumed that OSD shall be used to determine the lower amount of tax. [Sec.500 . 79(F).000 P70.500) P 67.000 Income tax when no income of estate was distributed (Case 1 + Case 3) (P59.000) Net income Less: Basic personal exemption Net taxable income P200. the applicable exemption would be P20..000 P220.128 INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 14: Income Taxes of Estates & Trusts Problem 14 – 4 D Gross income Less: OSD (P200.000 160. In the given problem.000 The estate can deduct greater amount of deductions by using OSD. Mrs. his estate may still claim personal and additional exemptions for himself and his dependents.000 P240.000 represents the income of the estate after death. Ayugat can claim her basic personal exemption of P50.000 but she cannot claim additional exemptions because her husband is the proper claimant of the additional exemptions unless the husband waives his right or has no income taxable in the Philippines. Not in the choices = P5.000 x 40%) Net income before personal exemption Less: Absolute exemption Net income subject to income tax P400. It does not include the income before death. Section 35(C) of NIRC provides that if the taxpayer dies during the taxable year.000 It must be noted that the P400.000 50. NIRC] Problem 14 – 5 Note: Since the requirement is tax savings.000 P120. In this case. Letter B Gross business receipts of Mathai’s estate after death Less: OSD (P400.000 20.000 80. 1. Correction: Requirement 2 should be: … of the estate of Mathai’s mother. 2.000.000 + P8.

000 ( 60.500 .000) .500 Naty Goc cannot claim the additional exemption of her minor child because her husband is deemed head of family and proper claimant of the additional exemption.129 INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 14: Income Taxes of Estates & Trusts Less: Income tax when P150.000) x 30% Case 2: (P190. 8.000) P180.500 22.000 200.500 5.000 P 70.500) 62. P 50.000) 160.000) x 25% Total income taxes Case 1 Case 2 Case 3 Case 4 500.000 Tax on P30.000 22.000 P 8.000 P22.500 10.500 + P4.000 x 40%) Net income before exemption Personal exemption Net taxable income Tax on P140.000 27.000) Less: Income tax due – case 1 Income tax savings – 200y Gross income Itemized Amount distributed – child OSD (P200.000) P 90.000 Case 3* P150.000 Problem 14 – 6 1.000) 120.000 (20.000 Tax on excess: Case 1: (P40.000 (140.000) 210.000 150.000 – 140.000 – P140.500 . 35.000 .500 32.000) 350.000 (300.000 50.000) P 40.000) 190. 59.000) x 25% Case 4: (160.000) P 30.000 Case 2* P500.000) 70.000 – P250.000 (200.000 350.500 8.000 200.000 200. NIRC] 2.000) .000 (50.000 (140.500 12.000) 280.000 Tax on P70. P200.000 ( 20.000 500.500 P 5.000 Tax savings Supporting computations: Gross business receipts Distribution to the beneficiary Balance OSD – 40% Net income before personal exemption Personal exemption Net taxable income Income tax for first bracket Income tax on excess Case 1: (P280.000) Case 1* P500. Letter C Gross business income Less: Business expenses Net income before personal exemption Less: Personal exemption – basic Net taxable income P320.000 (300.500 P2.000) (150.000 50.000 (20.000 x 25%) P 6.000) 210. 500.000 of estate’s income was distributed (Case 2 + Case 4) = (P35.000 ( 50.000 (150.000 .000 (80.000 P 2. Letter A Income tax due – case 2 & case 3 (P2.500 (P26. 79(F).000 (50.000) 300.000 P120.000 . 200.500 9.000 + P27.000 . [Sec.000 ( 20.

P 2.000) P600.000.000. Anao’s income will used the basic personal exemption of P50. *Case 2 – Income tax of the estate (P150.000) 200y P 6.000/85%) Personal exemption Net taxable income Tax on P500.000 *Case 1 – Income tax of the estate (no portion is distributed to heir). Letter A 200x Amounts received by wife 200x: (P425.200.000) P1.380. 2.600 .000) ( 800. P32.500 .000 P125.000 (240.000/85%) 200y (P765.000 (2.000) ( 20. Problem 14 – 7 1.000 x 32%) Income tax due 200x P 5. Anao’s estate while Mr.380.800.000 P125.600 441. *Case 3 – Income tax of the heir (P150.000) .000) P1.500 P 4.000 is to be used for the income of Mr.000. Letter C Gross income Operating expenses allowed Amounts given to beneficiaries 200x (P680.130 INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 14: Income Taxes of Estates & Trusts Case 3: (P10.000 (3.000 is distributed to heir).000 ( 900.000 is received from estate).000/85%) 200y: (P510.000 x 15%) Income tax due .500 1.000 281. P406.600 The absolute exemption of P20. The tax saving is brought about by splitting the taxable income between taxpayers thus lowering the taxable income to lower tax rate and availing two personal exemptions.000/85%) OSD (40%) 200y P500.000 Tax on excess: 200x: (P880.000) ( 20.000 (200.600 P566.000 x 32%) 200y: (P1.880.

000) P300. P 50.000 . It follows. Letter B Amount received from trust B (P4.000 .000 x 15%) Income tax refund 90. Furthermore. Personal exemption Net taxable income ( 50.200.000 x 20%) Income tax due Less: 200y Creditable withholding tax (P300.000) Income tax due Less: Creditable withholding tax 200x: (P500.000) P130. Tag Anao.000 300.000 P1.000 P 50.000) P310. P 25.000 (P24.000/95%) Total income before OSD Less: OSD (P1.500) A beneficiary of an estate engaged in business has the status of self-employed individual taxpayer. son in 200y (P255.000 Letter C Amount received by Mr.500.500 45.000/85%) Absolute exemption Net taxable income of trust Problem 14 – 9 1.000 P 22.500.000 Tax on excess (P60.000 x 40%) P600.000 P100.000 18.000) ( 50.000 120.000 75.000 .500 12.000 x 15%) Income tax refund Less: 200x income tax refund 200y’s tax refund is lower by P 50.000 P 8.000 Basic personal exemption 50. Problem 14 – 8 C Income of trust Less: Amount distributed to the heir (P85.000 650.000) P250.000 x 15%) 200y: (P600. the amount paid to the beneficiary has not been subjected to business expenses.800.000 P1.000 Tax on P250.131 INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 14: Income Taxes of Estates & Trusts 3.000 (P 3.000 P400. that such beneficiary can claim the itemized deduction or optional deduction in the computation of his net taxable income.000 P 68.000/85%) OSD (40%) Personal exemption Net taxable income Tax on P70.000 P280.000/80%) x 20% Rent income (P285.000 Tax on excess (P60.000 (120. therefore.000 20.000 ( 50.000 P 20.000 25.

600 P1. 60 (C)(2).000 200. Sec.980.000 15. the trustee should make a separate return for each of the trusts in his hands.600 P2. When a trustee holds trust created by different persons for the benefit of the same beneficiary.000 Tax on excess (P350.780. Letter B Income of the grantor Income of trust A . Letter D Income of trust B – irrevocable trust P1.500.132 INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 14: Income Taxes of Estates & Trusts Net taxable income Tax on P500.000 20.revocable Total income of the grantor Less: Total expenses Grantor – business expense Trust A – business expense Grantor’s income before personal exemptions 2.000.000 195.000 P200.800.000 x 5%) Income tax still due and payable 2.000 . P 850.000 x 32%) Trust B (P4.600 .000 Trust B P4.200.000.480.600 + P1.000 P237.000 P4.000 P1. Regs.600 1.000 P 125. NIRC] Problem 14 – 10 1.238.000 P 42.494. Rev.000 Tax on excess: Trust A (P3.000 x 15%) CWT from rent income (P300.000 P180.000 1. 2. No.000 20. the creator of the trust in each instance is the same person and the trustee in each instance is the same but the beneficiaries are different.113. (Sections 208 & 215.000 x 32%) Income tax due of each trust Total income tax due (P1.369.600) Trust A P4.000 500.000 P 125.000 P3.000 P400.000 P125.000 P 900.000 x 32%) Income tax due Less: CWT on amount received from trust (P1.238.000 Letter C Net income before exemption Less: Exemption Net taxable income Tax on P500. P1.494.280. he should also make a return for each trust separately.000 112.000 600.200 In case of more than one trust.733.

000.000 50.000 P 80.600. Letter A Since the amount given to the daughter is not considered as deduction from irrevocable trust.000 P150. 2. Problem 14 – 12 1. Letter A The trust is not taxable because it is revocable.000.000 Tax on excess (P1.000 50.133 INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 14: Income Taxes of Estates & Trusts Less: Expenses of irrevocable trust – B Net income before exemption Less: Exemption Net taxable income of all the trust 100.000 P 90. 3.000 P125.000 Problem 14 – 11 1.000 464.000 P 40.000 x 40%) Net income before personal exemption Less: Personal exemption Net income P100. Letter D Net income of Mr. Tan. such amount is considered allowance. Conjugal gross income from estate Less: Business expense (P5.000. Therefore.000 Assume beneficiary opted to use OSD.000 20. The supposed income tax of the trust shall be included in the income tax of Mr.400. 3.950.000 x 40%) Income distributed to beneficiaries Conjugal net income P5.000 Note: Only the income of irrevocable trust is entitled for special deduction.000.000 60.000 P2.000 2.000 600.000 x 32%) Income tax due P2. not subject to tax.000 . Tan Less: Basic personal exemption Net taxable income Tax on P500.000 P100.000 P2.450.000 P589.000 50. Letter D Income of beneficiary Add: Share from trust Total gross income Less: OSD (P150.000 P1.

000 Note: Unless the taxpayer signifies in his ITR his intention to elect the OSD.000 Tax on excess (P680. he shall be considered as having availed himself of the itemized deductions.000 217.000 P 46. 2.000 100.000 P 50.000 P300.000 15. such income shall be filed separately using his TIN and allowed to deduct basic exemption as if he died at the close of the taxable year.180.000 P65.000 Tax on excess (P80. Baguingan: Income share of Mr.000 x 30%) Income tax due P50.000 absolute exemption. Baguingan will acquire a new TIN and file a separate ITR claiming P20.134 INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 14: Income Taxes of Estates & Trusts 200x income tax due from the estate of Mr.000 P370. If Mr.000 P1. Baguingan has income in 200x prior to his death.200.000 Tax on P140.500 24. Diana Nievera P250.000 Tax on P500.000 P450.400.600 P 342.000 200. NIRC) Alternative solution: If beneficiary opted to use OSD Compensation income Add: Income received from trust.000 Tax on P250. net of OSD (P200.000 Tax on excess (P50. 34(L). Baguingan’ estate (P2.000) Net taxable income P250.500 Total amount received by the children Multiply by withholding tax rate P600.000 + P100. Compensation income Add: Income received from trust Total income before personal exemption Less: Personal exemptions (P50.600 The estate of Mr. .000) x 32%) Income tax due P 125.000 x 30%) Income tax due P 22.000 x 4) Taxable income of Mrs. (Sec.000 x 60%) Total income before exemption Less: Personal exemptions: Basic Additional (P25.000 15% 3.000 P220.000 20.000 150.000 x 50%) Less: Exemption Taxable income P1.000 120.000 150.

000 x 12) Income from farm Total gross income from trust Less: Related expenses (P250.900 Case 1 Case 2 Case 3 Case 4 800.000 P 105.000 50.500 6. 540.000 .000 + P8.000 800. P140.500) Less: Income tax when P150.400 Problem 14 – 14 1.000 P 75.000) (150. P131.000) 370.500 P 80.000 300.500 P 19.000 50.000 22.000 + P42.000 of estate’s income was distributed (Case 2 + Case 4) = (P86.000 270.500 20.500) Tax savings Supporting computations year after death: Gross income Business deductions: Itemized deductions Distribution to beneficiary Net income before personal exemption Personal exemption Net taxable income Income tax for first bracket.000 P 125.000 Problem 14 – 13 Tax savings: Income tax when no income of estate was distributed (Case 1 + Case 3) (P122.000) 390.000) 150.000 (260.500 P 2. 8.000 Income tax for first bracket.000) 520.000) .000 – 250.000 125.000 P 250.000 Income tax for first bracket.000 125.400 Income tax payable from the beneficiary in 200x: Gross income received from income of trust Less: Personal exemption 36.500 8.000 Tax on excess (P35.000 120. P70.000 – 140.000 .000 Income tax on excess Case 1: (520.000) 220.000 20. P250.000 P 8.000 42.000 (20.400 .000 (180. P500.000) x 25% Total income taxes 128.135 INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 14: Income Taxes of Estates & Trusts Total withholding taxes P 90.000 (180. 86.000 (50.000 – 500.000 (50.000 (260.000 300.000 50.000 .000) x 32% Case 2: (370.000 (20.000) 70.000 x 30%) Amount distributed to the beneficiary Net income before exemption Less: Exemption Net taxable income Tax on P70.000 50. 120.000) x 30% Case 4: (220.500 10. Income tax payable by the trust in 200x: Income from house and lot Income from hollow block business (P10.000 P 50.000 Income tax for first bracket. 131.000 x 20%) Total income tax payable 2.000) .

000.000.000 P 80.000 Tax on excess (P10.000 Problem 14 – 16 Note: Since the topic is tax planning and the requirement is tax savings. .050.000 P30.500 2. Total income tax payable P 0 .000 + P20. .000 20.000 P100.000) Exemption Net taxable income Tax on P500. 150.000 P100.000 P1.000 Tax on excess (P500. he shall be considered as having availed himself of the itemized deductions.500 Gross income received from income of trust Less: Optional standard deduction (P50.000 x 32%) Income tax due and payable P1.000 50.000 20.136 INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 14: Income Taxes of Estates & Trusts Net taxable income P 0 . (Sec.000 + P1.000 x 40%) Net income before exemption Less: Personal exemption Net taxable income P50.000 P 8.000 (P30. 34(L).000 20.000 Tax on P70. OSD can automatically assumed to be used to determine the lower tax.000 P10.000) Total income tax payable P 0 Problem 14 – 15 Correction: The requirement should be stated as: How much is the income tax due of the two trusts? Total net income of trusts (P50. Total gross income – trust Less: OSD (P250.000 P 30. Note: Unless the taxpayer signifies in his ITR his intention to elect the OSD. NIRC) Alternative solution – if Trust and beneficiary opted to use OSD 1.000 P125.000 50.000 160.000 P285.000 50.000 x 40%) Amount distributed to the beneficiary Net income before personal exemption Less: Personal exemption Net taxable income P250.000) Less: Distribution to beneficiary (P10.000 x 20%) Total income tax payable 2.

therefore.000 – 140.500 8.000 .000 Tax savings Supporting computations: Gross business receipts Distribution to the beneficiary Balance OSD – 40% Net income before personal exemption Exemption Net taxable income Case 1 Case 2 Case 3 Case 4 500.137 INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 14: Income Taxes of Estates & Trusts 1.000 P240.500 .000 (80.000 (200. 8.000) x 30% Case 2 (P190.000) x 25% Total income taxes 9.000) 300.000 120.000 (140.000 (50.000 (140.000 of estate’s income was distributed (Case 2 + Case 4) = (P35. 500.000) 70.000 .000 The P300.500 62.000 x 40%) Net income before personal exemption Less: Exemption Net income subject to income tax P300.000 x 40%) Net income before personal exemption Less: Personal exemption Net taxable income P400.000 P160. 2.000 350. 59.000) 190. 200.000 150. To minimize income tax.000) 210.000 P190.000 50.000 22.500) Less: Income tax when P150.000 – P140.000 + P27.000 is the business gross receipts of the estate. Gross receipts Less: OSD (P300.000 160.000 – P250. Put his business under irrevocable trust b.000 (150.000 (20.000 50.500 22.000 27. Income tax when no income of estate was distributed (Case 1 + Case 3) (P59.000) 280.000 P180.000 Problem 14 – 17 1.000 200.000) 160.000 .000 500. and c. Tax exposure before the creation of trust: Gross income Less: OSD (P400.000 exemption.000) 350.500) P 67.500 5.000 .000 20. 35. 2.000 (20. Dokling can do the following: a.000) x 25% Case 4: (160.500 12.500 Income tax for first bracket Income tax on excess Case 1 (P280. Claim his child’s allowance as amount of distribution to beneficiary from the income of the trust.500 P 5.000 (50. subject to P20.000) 210.000 + P8.000) 120.000 .000 200. Use OSD instead of itemized deduction because the OSD is greater than the itemized deduction.

the taxpayer should use OSD instead of itemized deduction because using OSD can give a greater tax savings based on the given data of this case.000 Tax on P70.500 P35. 1.000 x 40%) Net income before personal exemption Less: Personal exemption Net taxable income ( 8.000 P180.000 50.000 P 60.500) P200.000 P120.000 20. 50% of the business is created as irrevocable trust: Grantor: Income tax if 50% is held in trust (irrevocable) Gross income (50%) Less: OSD (P200.000 50.500 12.000 P 80.000 Tax on P10.000 Problem 14 – 18 Note: Since the topic is tax planning.000 x 25%) Income tax due P22.000 Trust: Income tax if 50% is held in trust (irrevocable) Gross income (50%) Less: OSD (P200.000 P .000 50.000 40.000 P 70.000 x 40%) Net income before personal exemption Less: Personal exemption P 800.000 80. the business is not in trust.000 100.000 .138 INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 14: Income Taxes of Estates & Trusts Tax on P140.000 x 40%) Net income before personal exemption Less: Personal exemption Net taxable income P200.000 P 10.000 ( 500) Tax savings P26. Rent income Less: OSD (P800.000 320.000 x 40%) Distribution to beneficiary Net income before personal exemption Less: Exemption Net taxable income Beneficiary: Share from the income of trust Less: OSD (P100.000 Note: The allowance is not deductible because the child is not established as beneficiary of the trust. Furthermore.0 - P100.000 P 480.000 Tax on excess (P50.000 P 20.

000 x 30%) P 50.000 P 300.139 INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 14: Income Taxes of Estates & Trusts 2. 2.000 Add: Tax on excess (P60.000 50.000 Add: Tax on excess (P180.500) ( 59.500 12. Net income P 430.000) P 24.000 Tax on P250.000 Rent income – Property 2 Less: OSD (P300.000 P104.000 Tax on P250.000 P 180.000 x 20%) Income tax due Less: Income tax property no.000 x 40%) Net income before personal exemption Less: Personal exemption Net income P 500.000 x 30%) Income tax due P 50.000 54.500 .000 x 40%) Net income before personal exemption Less: Personal exemption Net income P 300.000 Tax on P70.000 Tax savings 8.000 200.000 20. 1 P Rent income – Property 1 Less: OSD (P500.000 9.000 P 280.000 P 130.000 ( 20.000 Tax on excess (P30.000 120.