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Chapter 2 : DEDUCTIONS FROM THE GROSS ESTATE

Deductions from the gross estate:

1. Ordinary deductions
(a) Expenses, losses, indebtedness, taxes, etc.
(1) Funeral expenses;
(2) Judicial expenses of testamentary or intestate proceedings;
(3) Claims against the estate;
(4) Claims against insolvent persons;
(5) Unpaid mortgage or indebtedness of the property;
a. Taxes
b. Losses.
(b) Transfer for public use;
(c) Vanishing deduction;

2. Special deductions
(a) Family home;
(b) Standard deductions;
(c) Medical expenses
(d) Amount receivable by heirs under RA No. 4917

Items 2(a), 2(b), and 2(c) are not available to the estate of a non-resident, not
citizen of the Philippines.

FUNERAL EXPENSES

Funeral expenses paid or unpaid from the estate, are deductible at the actual
expenses, or 5% of the gross estate, or P200,000, whichever is the lowest.

The cut-off point is internment. Expenses incurred after internment are not included
in the funeral expenses.

JUDICIAL EXPENSES

It includes fees on the executor or administrator, attorneys fees, court fees


accountants fees, appraisers fees, clerk hire, cost of preserving and maintaining
the property, and brokerage fees for selling properties in the estate.

Deductions for judicial expenses in the settlement of the estate in or out of the
court are allowed if incurred within six months from the date of death.

CLAIMS AGAINST THE ESTATE


Obligations if enforceable against the decedent when he was still alive can be a
claim against the estate. However if it prescribed already during the lifetime of the
decedent it is no longer a valid claim. Any claim arising out of debt instrument must
be notarized. If the loan was contracted within three years from the death of the
decedent, the administrator or executor must submit a statement showing the
disposition of the proceeds of the loan.

CLAIMS AGAINST INSOLVENT PERSONS

Insolvent persons have two kinds of creditors, preferred and ordinary. Preferred
creditors will first be paid in full from the properties (e.g. the Government for unpaid
taxes) and the balance of the properties will be divided proportionately to the
ordinary creditors.

Claims against insolvent persons are deductions from the gross estate. The full
amount of the receivables are added to the gross estate and the uncollectible
portions shall be included in the deductions from the gross estate.

UNPAID MORTGAGE OR INDEBTEDNESS ON PROPERTY

The gross estate must include the fair market value of the property, undiminished
by the mortgage or indebtedness. The mortgage or indebtedness will then be
claimed as a deduction from the gross estate.

TAXES

Only taxes that accrued before death can be deducted.

LOSSES

Losses are deductible from the gross estate if:

1. Arising from fire, storm, shipwreck or other casualty, robbery, theft or


embezzlement.
2. Not compensated by insurance or otherwise;
3. Not claimed as a deduction from income tax return of the estate;
4. Occurring during the settlement of the estate;
5. Occurring before the last day for the payment of the estate tax (last day to
pay: six months after the decedents death, or allowed extension);

TRANSFER FOR PUBLIC USE

Deduction from the gross estate through a last will and testament, or transfer to
take effect after death, in favor of the Government of the Philippines, or any political
subdivision thereof, exclusively for public purpose.
VANISHING DEDUCTION

Property may change hands within a very short period of time by reason of an early
death of the owner who received it by inheritance or gift. This becomes too heavy a
burden because for every transfer of property it is subjected to tax.

Conditions if vanishing deduction is to apply:

1. The present decedent died within 5 years from the receipt of property from a
prior decedent or donor.
2. The property on which vanishing deduction is being claimed must be located
in the Philippines.
3. The property must formed part of the taxable estate of the prior decedent, or
of the taxable gift of the donor;
4. The estate tax on the prior succession or the donors tax on the gift must
have been finally determined and paid;
5. The property on which vanishing deduction is being claimed must be
identified as the one received from the prior decedent, or from the donor, or
something acquired in exchange therefor;
6. No vanishing deduction on the property was allowable to the estate of the
prior decedent.

Computation for the vanishing deduction

Step 1. Determine the basis of the vanishing deduction:

1. The initial value to take as the basis of the vanishing deduction is the value of
the property in the prior estate (or value used for donors tax purposes), or
the value of such property in the present estate, whichever is lower. Where
the property referred to consists of two or more items, the aggregate of the
item by item lower of two values shall be the initial basis.
2. The value in (1) shall be reduced by any payment made by the present
decedent on any mortgage or lien on the property where such mortgage or
lien was a deduction from the gross estate of the prior decedent, or gift of the
donor;
3. The value in (2) shall be further reduced by:

Value as reduced in (2)/Gross estate x Expenses, losses, indebtedness, taxes


and transfers for public use (not including the special deductions)

Step 2. On the computed basis in Step 1 apply the table below:

% If received by inheritance or gift


100 Within 1 year prior to the death of the decedent
80 More than 1 year but not more than 2 years prior to the death of the
decedent
60 More than 2 years but not more than 3 years prior to the death of the
decedent
40 More than 3 years but not more than 4 years prior to the death of the
decedent
20 More than 4 years but not more than 5 years prior to the death of the
decedent

Example: Ms. Jane inherited a piece of land and a car from her father on May 18,
2008. The estate tax was paid on the fair market value of P1,200,000 for the land
and P400,000 for the car. At the time she inherited the land, it was subject to a
mortgage of P100,000. During her lifetime she paid P80,000 on the mortgage
indebtedness. On December 14, 2011, Ms. Jane died. Included in her gross estate of
P6,000,000 were the land and the car that she inherited from her father. On
December 14, 2011, the land had a fair market value of P1,400,000 and the car
had a fair market value of P380,000. Ordinary deductions amounted to P900,000.
How much would be the vanishing deduction?

Solution:

Land (lower fair market value) P1,200,000


Car (lower fair market value) 380,000
Initial basis P1,580,000
Less: Mortgage indebtedness paid 80,000
Balance P1,500,000
Less: P1,500,000/P4,500,000 x P900,000 300,000
Basis of vanishing deduction P1,200,000

Vanishing deduction:
11- 12 - 25
08 5 18
3- 7 - 07 or 40% of P1,200,000 P480,000

FAMILY HOME

A family home is the dwelling house where the decedent and his family reside, and
the land on which it is situated. Within the meaning of family are the spouse,
parents, ascendants, descendants, brothers and sisters, who are living in the family
home and who depend upon the head of the family for support.

The deduction for family home is an amount equivalent to the current fair market
value of the decedents family home. The maximum is one million pesos
(P1,000,000).

The deduction from the gross estate for family home shall be allowed when the
family home is certified as such by the Barangay Captain of the locality where it is
located.
STANDARD DEDUCTION

The gross estate of every decedent who was a citizen or resident of the Philippines
always has a standard deduction of P1,000,000.

MEDICAL EXPENSES

Deductions from the gross estate is allowed for medical expenses, whether paid or
unpaid at the time of death, incurred by the decedent within one year prior to his
death, if substantiated with receipts. The deduction for medical expenses shall not
exceed P500,000.

Table of Deductions from the gross estate with ceiling:


1. Funeral expenses Actual funeral expenses or Whichever is the lowest
5% of the gross estate or
P200,000
2. Medical expenses Actual medical expenses Whichever is lower
or P500,000
3. Family home Fair market value or Whichever is lower
P1,000,000

AMOUNT RECEIVABLE UNDER REPUBLIC ACT NO 4917

Any amount receivable by the heirs from the decedents employer as a


consequence of the death of the decedent-employee in accordance with RA 4917
shall be deductible from the gross estate of the decedent.

DEDUCTIONS FOR A NON-RESIDENT, NOT CITIZEN OF THE PHILIPPINES

A decedent shall be subject to estate tax only for his estate in the Philippines.
Deductions are:

1. Expenses, losses, indebtedness, taxes, etc:

Gross estate, Philippines/Gross estate, World x World expenses, losses


indebtedness, taxes, etc

2. Transfers for public use of property in the Philippines;


3. Vanishing deduction on property in the Philippines.

This type of decedent is not allowed special deductions.

Example: Mr. James, a citizen and resident of USA, single, died leaving a gross
estate of P1,200,000 in the Philippines, and P2,400,000 in USA. Expenses, losses,
indebtedness, taxes and other ordinary deductions in the Philippines amounted to
P600,000 while in the USA incurred ordinary deductions amounting to P900,000.
The deductions from the Philippines gross estate are as follows:

Gross estate within the Philippines P1,200,000


Gross estate within USA 2,400,000
World Gross Estate P3,600,000

Ordinary deductions within the Philippines P600,000


Ordinary deductions within the USA 900,000
World expenses P1,500,000

Deduction:
P1,200,000/P3,600,000 x P1500,000 P500,000

Problem 1:

Mr. A, a citizen of the Philippines, died with a gross estate of P8,000,000 and the following expenses
related to his death.

Unpaid as at the time of death:


Obituary P25,000
Clothes of the decedent (worn in the coffin) 2,000
Food and beverages for those who attended the vigil at the funeral home 10,000
Amount paid to the priest who celebrated a mass for the dead 500
Contract price for a family mausoleum 500,000
Food and beverages on the ninth day after death, and after interment 2,000
Card of thanks for those who condoled 300

Paid at the time of death:


Cost of burial plot (with accommodations for the five members of the
Family of the decedent P500,000

A memorial plan was purchased by the decedent for P200,000, and the seller fulfilled its obligations
under the plan.

Actual funeral expenses?


Allowable deduction for funeral expenses?

Problem 2:
Mr. A, a citizen of the Philippines with gross income within and outside the Philippines, died on March 1,
2010. The following information were given among others to determine the amount deductible:

For judicial proceedings in the Philippines:


Filing fee of estate proceedings with the courts P20,000
Publication cost of notice in the newspaper of estate proceedings 15,000
Acceptance fee of the lawyer, May 5, 2010 50,000
Court appearance of the lawyer. August 2, 2010 10,000
Court appearance of the lawyer, Oct 5, 2010 10,000
For judicial proceedings in the foreign country for a lump sum agreed
payment of P500,000 for all expenses in the settlement of the case abroad
until terminated.
Remitted to the law firm abroad on April 5, 2010 (date of
agreement) 150,000
Remitted to the law firm abroad on November 5, 2010 100,000
Loss of property in the estate, July 2, 2010 60,000
Loss of property in the estate, October 1, 2010 40,000

Deduction for judicial expenses?


Deduction for losses?

Problem 3:

The decedent died in the Philippines with receivables as follows:

From a debtor who has no properties whatsoever P100,000


From a debtor whose assets in relation to liabilities is 1:3 300,000
From a debtor whose assets amounted to P1,300,000
with a tax liability of P100,000 and other indebtedness of
P4,000,000 600,000

How much is the deduction from the gross estate for claims against insolvent persons?

Problem 4:

Mr M died single, leaving properties, among which was property that he inherited three and one half
years before. At the time he inherited the property it had a fair market value of P1,100,000 and mortgage
of P100,000. The fair market value of the property in the present estate is P2,000,000 and the mortgage
indebtedness was paid in full by Mr. M. The gross estate of Mr M is P4,000,000, and allowable
deductions not including vanishing deduction and standard deduction is P400,000. How much is the
vanishing deduction?

Problem 5:

Mr B died leaving property that he inherited one and one-half years ago, as follows:

Property in the Philippines P5,100,000


Property in Indonesia 1,000,000
Property he acquired thru his own efforts 4,900,000

The property inherited had fair market value at the time received as follows:

Property in the Philippines P3,000,000


Properties in Indonesia 1,200,000

Ordinary deductions from the gross estate not including the vanishing deduction, had a total of
P2,000,000.

How much is the vanishing deduction?

Problem 6

Mr. C died leaving a gross estate of P5,000,000, in which are included property and cash received as gift
within the year of P550,000 and P500,000, respectively. At the time the property was received as gift, it
had a fair market value of P450,000, with an unpaid purchase price of P50,000. Mr. C paid the unpaid
purchase price. Ordinary deductions from his gross estate, not including vanishing deduction, had a total
of P1,500,000. How much is the vanishing deduction?

Problem 7

Mr. D died leaving the properties, with fair market values, that follow:

Property inherited two and one-half years ago (fair market value was P1,000,000) P1,200,000
Property received as a gift 2 years ago (fair market value when received was P800,000 500,000
Other properties in the gross estate 3,300,000
Ordinary deduction from the gross estate, not including vanishing deduction, had a total of P1,200,000.
How much is the vanishing deduction?

Problem 8

The decedent was a citizen of the Philippines who died from an illness on December 25, 2007. Item of
expenses in the hospital were:

For the hospital room P 30,000


For the laboratory examination 40,000
For the operating room 10,000
For ICU expenses 400,000
For the attending physicians 300,000
For medicines 300,000
For merienda of visitors 50,000

How much is the deduction for medical expenses?

Problem 9

The decedent was a citizen of the Philippines who died on November 1, 2010 from a lingering illness.
Medical expenses were incurred:

September 2, 2009, still unpaid, with promissory note P 60,000


January 2, 2010, still unpaid, with promissory note 100,000
October 20, 2010, paid 250,000
October 30, 2010, unpaid, with promissory note 200,000

How much is the deduction for medical expenses?

Problem 10

In the properties in the estate of a decedent were:

Family home in the Philippines P2,000,000


Cash on hand in a Philippine bank 2,800,000
Receivable under RA 4915 200,000
Other properties outside the Philippines 2,000,000
Among expenses at the time of, and after death were:
Funeral expenses P 300,000
Judicial expenses 500,000
Claims against the estate 348,000
Medical expenses 600,000

There was a legacy of P2,000 to the Government of the Philippines, and of P3,000 to
the Society for the Blind, a charitable institution.

a. If the decedent was a resident and citizen of the Philippines:


1. How much is the total of ordinary deductions?
2. How much is the total of special deductions?

b. If the decedent was a non-resident, not a citizen of the Philippines:


1. How much is the total of ordinary deductions?
2. How much is the total of special deductions?

Problem 10

The decedent was a citizen and resident of the Philippines, single, head of the
family, who died one and half years after he inherited property from his father. At
the time of death, the following were the data pertinent to the computation of the
estate tax:

Property inherited (used as family home)


Fair market value at the time inherited P1,200,000
Fair market value in the present estate 2,000,000
Mortgage indebtedness paid by present decedent 200,000
Ordinary deductions (not including the vanishing deduction) 800,000

How much is the total of the deductions from the gross estate?