2-14 Computation for the vanishing deduction , Col ae e basis of the vanishing deduction: ine th Step 1. Determ! lue to take as the basis of the vanishing de. a The initia te value of the property in the prior estatg C duction re for donor's tax purposes), or the value of Such value U in the present estate, whichever is lower. Wh prope oy referred to consists of two or more items, the ade of the item by item lower of two values shail bg the initial basis. it by any payment made The value in (a) shall be reduced é by the present decedent on any mortgage or lien on the pro- perty, where such mortgage or lien was a deduction from the gross estate of the prior decedent, or gift of the donor; The value in (b) shall be further reduced by: Value as reduced in(b) x Expenses, losses, indebtedness, Gross estate taxes and transfers for public use* “Not including the special deductions of family home, standard deduction, medical expenses and amounts receivable under Republic Act No. 4917. Step 2. On the computed basis in Step 1, apply: % If received by inheritance or gift ‘Sh Mivicee perme ae cen in eee seg the death of the decedent t Not more than four years prior to 20% More than four death of the decedene” ut Not more than five years prior to the lifetime. 7 which weenie Stil had the car at the time of his death, There can be 8nd one-half years after the death of Mr. Q “vanishing deduction on the car, becaus?Deductions from the gross estate 248 Can there be a va-__ the car can be identifed as property acquired in exchange nishing deduction on of the inherited land ; ee eats by _ Mlustration. Mr. S inherited real property from Mr. R. inheritance or gift, or Three years after the inheritance he died, and the property ifis the proceeds was inherited by Miss T. Four years after Miss T inherited from theGale bf the the property, she died, and the property was inherited received by by Mr. U. Two years after inheriting the Property, Mr. U inheritance or gift. died, and the property was inherited by Miss V. Six years og after inheriting the property, Miss V died, Vanishing de- duction shall be or shall not be available to estates, as shown in Figure 2-5. Mustration. Mr. X died leaving two pieces of land to Miss Y, one located in the Philippines and another in Malaysia. Two years after, Mr. X died still Owning the two pieces of land. There can be a vanishing deduction on the piece of land in the Philippines. There can be no vanishing de- duction on the piece of land in Malaysia. Mustration. Mr. Z inherited a car and a motorcycle from Mr. AA, acitizen of the Philippines. The Properties were in the United States at the time of inheritance. The Phi- lippine estate tax was paid on the Properties. Mr. Z years after inheriting the property, Mr. Z died in the Philippines. At the time of his death the car was in the Philippines while the motor- cycle was still in the United States. Can there be a vanis hing deduction on the car? Can there be a vanishing ded luction on the motorcycle? On the car: (a) The present decedent died within five years from re- Ceipt of the Property from the prior decedent; (b) The Property formed part of the taxable estate of the Prior decedent (even if abroad at that time because the Prior decedent was a citizen of the Philippines); (c) The estate tax on the prior succession was determined and paid: (4) The car ca (€) There was Prior estate In be identified as the same Car inherited; NO vanishing deduction on the car in the2-16 There can be va- nishing deduction only on property |o- cated in the Philip- pines at the time of death of the pre- sent decedent. f) The property was in the Philippines when Mr. Z dieg ( aia motor jecedent died within five years from re. . woot of the property from the prior decedent; (b) rs property formed part of the taxable estate of the rior decedent (even if abroad at that time because the prior decedent was a citizen of the Philippines), ' (c) The estate tax on the prior succession was determined id: (d) = Foreycle can identified as the same motorcycle inherited; (e) There was no vanishing deduction on the motorcycle in the prior estate; i (f) The property was not in the Philippines when Mr. Z died. 4 There can be a vanishing deduction on the car because all the requirements for the vanishing deduction are prep- sent. On the motorcycle, there can be no vanishing de- duction because the motorcycle was not in the Philippines when Mr. Z died. Illustration. Mr. BB, single, inherited a piece of land from his father with a fair market value of P500,000 when inherited. Two and. one-half years later Mr. BB died still with the same piece of land, at this time wi it " ith a fair market value Of P600,000. The gross estat ot was P2,000.000. Deductio fe, on which the land was part, : x Ns from the gross estate (not in- eel home, medical expenses, starlet i om nd oT receivable under RA 4917) amounted to Hepa ie Shing deduction should have been com- Land, initial value to take Less: P500,o00/P2, 0 P500,000 000,001 a bs vanishing deduction” oe 10 30 aa ishing deduction (60% of P400,000) rae 000 Mustration, Ni ; acatonn iss CC, single, inherited a piece of land and a " father on March 18, 2009. The estate taxDeductions from the gross estate 247 thereon was paid on the fair market value of the P800,000 for the land and P120,000 for the car. At the time she inherited the land, it was sul to a mortgage of P80,000. During her lifetime, sheCpaid>P70,000 on the mortgage indebtedness. On November 29, 2011, Miss CC died. Included in her gross estate of P3,200,000 were the land and car that she inherited from her father. On November 29, 2011, the land had a fair market value of P850,000 and the car had a fair market value of P70,000. 0 properties sub- ject to vanishing de- Deductions from the gross estate for expenses, losses, duction, with acom- debtedness, taxes, etc., and transfers for public purposes mon percent to ap- amounted to P600,000. The vanishing deduction should ply, shall have a con- have been computed as follows: solidated computa- tion, Land, value to take P800,000 Car, value to take 70,000 but, Initial basis P870,000 Less: Mortgage indebtedness paid 70,0007 if there isnocom- —_ Balance P800,000 mon percent to ap- _ Less: P800,000/P3,200,000 x P600,000 150,000 apply, there shall be Basis of vanishing deduction P650,000 separate computa- Vanishing deduction: tations 11-11-29 09-3 -18 2-8-11, or 60% of P650,000 P390,000 ily home. The gross estate of a decedent who was a citizen or resident of the Philippines can have a deduction for family home. What is a family home? A family home of a married person, or an unmarried head of family, is the dwelling house where the person and his family reside, and the land on which it is situated. Within the meaning of family” are the spouse, parents, ascendants, descen- dants, brothers and sisters, who are living in the family home and who depend upon the head of family for sup-ae —~e 2.18 port. is “ it equivalent to the home is “an amount eq 1 rent fair market value of the ean a ee E The Paximam is one million pesos (P14 ,000,000). : lepine aan aE cee i tate for family home Is the family home The deduction from the thes rane A aria ee here the “principal shall be allowed when the family he locality where it is residence” under __ such by the Barangay Captain of the rule on capital gain located. he income - = at feora person who wag renied at the time of death, Under the income and who was under thie system of absolute community tax law, the add- _ of property (or conjugal partnership of gains) in his pro- dress in the last - perty relationship with the spouse, the deduction for fa- income tax retum — mily home is one-half (1/2) of the fair market value of of the taxpayer is the family home, but shall not exceed one million pesos his principal re- _ (P1,000,000), if such family home was community pro- sidence, the “cer- _ perty (or conjugal property). See Chapter 5. tification of the Barangay Captain ,There can be one family home only. notwithstanding” Ahe deduction for family Illustration. Mr. DD, single, a head of family, a citizen and resident of the Philippines, died leaving as gross es- tate a family home with a fair market value of P2,000,000, together with other properties with a fair market value of 1,500,000. Deductions, among others, were: Funeral expenses of P'180,000, judicial expenses of P200,000, and other ordinary deductions of P1,100,000, but not including the family home. The net taxable estate was: Gross estate: Family home Other propertios P2,000,000 otal 1,500,000 Deductions: P3,500,000 Ordinary deductions —Deductions from the gross estate oo Funeral expenses: Actual P180,000 5% of P3,500,000 P175,000 Maximum P200,000 Allowed P 175,000 Judicial expenses 200,000 Other ordinary deductions 1,100,000 Special deduction - Family home 1,000,000 Standard deduction (page 2-20) 1,000,000 3,475,000 Net taxable estate P 25,000 If the decedent was a_citizen_of the Philippines resi- ding abroad, and his home was abroad, can there be a deduction for “family home” since the family home is in- cluded in his gross estate?(No/ The requirement of cer- tification by the Barangay Captain that the home was a “family home” cannot be satisfied. In case the decedent used as family home a part of a structure co-owned by him with others, the value of the family home to be included in his gross estate, and the deduction for family home, is only the value of that por- tion of the structure that belongs to him, the aggregate of which is subject to the maximum of P1,000,000 deduction for family home. If a family home is mortgaged, can there be a de- duction for mortgage payable and for family home toge- ther, the aggregate of which exceeds the value of the family home’ yes)The two deductions are from the gross estate, Net against the particular property only. Illustration. Mr. U died, a citizen and resident of the Philippines. Included in his gross estate was a family home consisting of land and a structure on it that he acquired thru a bank loan of P1,200,000. At the time of his death the property had a zonal value of P1,100,000, and an unpaid bank loan of P800,000. How much is the total of the de- ductions related to the property that can be claimed? P1,800,000, computed as follows:P 800,000 Unpaid mortgage 4 Family home i a D0 Total S aeeecan The two deductions are from theéntire gross estate, and mily home only. not from the family home OF") Standard Deduction. The law: “An amount equivalent to on: (P1,000,000).” re decedent who was a citizen or ways has a standard deduction of e million pesos he gross estate of every resident of the Philippines al P1,000,000. Mustration. Mr. EE, a citizen and resident of the Philippines, single, died leaving a gross estate of P6,200,000. Deductions for expenses and losses, subs- tantiated by receipts and other documents, amounted to P2,300,000. All other ordinary deductions amounted to P2,000,000. The net taxable estate should have been computed as follows: Gross estate P6,200,000 Less : Ordinary deductions - Expenses and losses P2,300,000 All other deductions 2,000,000 Special deduction - Standard deduction 1,01 00,000 Net taxable estate 0.000 7 300.000 Medical expenses. Deduction for medical expenses is allowed to the gross estate of a decedent who was a citizen or i of the Philippines.Deductions from the gross estate 2-24 /Deduction for Deduction from the gross estate is allowed for medical medical expen- expenses, whether paid or unpaid at the time of death, incurred by the decedent within one year prior to his ses, within one death, if substantiated with receipts. year prior to death, already Fhe deduction for medical expenses shall not exceed paid, or still to be paid, out ofthe five hundred thousand pesos (P500,000). See Figure 2- estate shall be ia allowed at actual or P500,000, Examples of medical expetnses are payments for the whichever is use of hospital room and hospital equipment, laboratory lower examination charges, medicines, and doctor's professio- nal fees. If the medical expense is co- Mustration. Mr. EE, a citizen and resident of the Philippines, vered by insu- was hospitalized for a lingering illness. He stayed in the hospi- rance, is the de- _tal from March 5, 2010 to September 5, 2011, on which later ductible medical he died, incurring expenses, as follows: expense only the March 5 to September 5, 2010, total P250,000 amount which is September 6, 2010 to September 5, 2011 not paid by the Hospital bills 800,000 insurer? The Medicines author thinks: Medicines 80,000 Yes. Doctors’ professional fees 500,000 Computation for deductible medical expenses: For medical expenses, September 6, 2010 to September 5, 2011 (within one year prior to death): Hospital bills P 800,000 Medicines 80,000 Doctors’ professional fees ‘500,000 Total of actual medical expenses 1,380,000 Maximum P $00,000 Deduction P 00,000 Buy why? Do they Not reduce hise- Per revenue regulation, medical expenses incurred more Quity in his pro- than one year prior to death, and still unpaid at the time of perties? deat Carrot eodeducted as claims against the estate.2-22 Deductions from the gross estate -a re 2-7. Deductions from the gross estate with ceiling. ure 2-7. 1. Funeral expenses: Actual funeral expenses; or 5% of the gross estate; or } whichever is lowest 200,000 2. Medical expenses: Actual medical expenses; or } whichever is lower 500,000 3. Family home: Fair market value; or } whichever is lower 1,000,000 Sa ee cece op ere Amount receivable under Republic Act No. 4917, Any amount receivable by the heirs from the dece- dent's employer as q Consequence of the death of the decedent-employee in accordance with Republic Act No. 4917 shall be deductible from the gross estate of the decedent. fe, estate shall. still show a deductions shall estate), there is no deduction bec: : Cause ti is we ei nr act how aah remains a SPublic Act 4917. op what still Ptdinary or Special deductions?Deductions from the gross estate 2.23 The revenue regulation on estate tax, as it Classified de- ductions into ordinary and special deductions, did not show the classification of: (a) Amount receivable under Republic Act No. 4917; and (b) Deduction for the “exempt acquisition or trans- mission” of “bequests . . to social welfare, cultural or charitable institutions .. . .” (See “Gross Estate”). It is the author's opinion that the two deductions should be classified as special deductions. Why? The now “ordinary deductions” were the original deductions under the law. Family home, standard deduction, medical expenses, and amount receivable under Republic Act Amount recei- 4917 are new deductions inserted by one amendatory ‘vable under RA law. If family home, standard deduction and medical ex- 4917 isaspe- _ penses are special deductions, the amount receivable un- cial deduction der Republic Act 4917 should be given the same treat- ment. And because only the original deductions in the law are ordinary deductions, any other deduction should be deduction pro- considered as “special deduction”. So, deduction (b) a- vided inalaw above, which used to be a deduction under a Presiden- other than the _ tial Decree, but now made part of the National Internal NIRC isaspe- Revenue Code as “exempt acquisition or transmission”, cial deduction should be a “special deduction’. Abeductions for a non-resident, not citizen of the Philippines. A decedent who_was a és citizen or resident of the Philippines at the fime of death with properties within and ol the Philippines, is subject to tax only on his estate cine Philippines. Due to this, the estate in the Philippines is allowed limited deductions (See Figure 2-8). Mustration. Mr. FF, a citizen and resident of Z foreign country, single, died leaving a gross estate of P 1,200,000 in the Philippines and P2,400,000 in ZZ foreign country. Expen-Deductions from the gross estate ses, losses, indebtedness, taxes, etc., in the Philippines amounted to P600,000, while expenses, losses, in. debtedness, taxes, etc., in ZZ foreign country amounted to P900,000. The deductions from the Philippine gross estate (Figure 2-8 Deductions from the gross estate of a non-resident, not citizen, of the Philippines a (a) Expenses, losses, indebtedness, taxes, ete.: Gross estate, Philippines x World expenses, losses, in- Gross estate, world debtedness, taxes, etc.* *Funeral expenses, judicial expenses, clams against the estate, claims against insolvent persons, unpaid mortgage or indebted- ness on properties, losses, taxes and losses. It does not matter where the expenses, losses, indebtedness, taxes, etc., were paid or incurred (whether within or outside the Philip- pines). On the total of the items, the formula provided by the law shall be applied. (b) Transfers for public use of property in the Philippines; (c) Vanishing deduction on property in the Philippines. for expenses, losses, indebtedness, taxes, etc., shall be computed, as follows: Gross estate within the Philippines P1,200,000 Gross estate within ZZ foreign country 2,400,000 World gross estate P3,600,000 Expenses, losses, indebtedness, taxes, etc. within the Philippines P 600,000 Expenses, losses, indebtedness, taxes, etc. within ZZ foreign country 900,000 World expenses, losses, indebtedness, taxes, etc. P1,500,000 Deduction: P1,200,000/P3,600,000 x P1,500,000 P 500,000 Ilustration. Mr, Q, a subject and resident of a foreig"Deductions from the gross estate 2-25 country, died leaving the following: Gross estate within the Philippines 2,000,000 Gross estate outside the Philippines 3,000,000 Funeral expenses, world 400,000 Other claims against the estate, world 600,000 The deductions from the gross estate in the Philippines would be: Funeral expenses (5% of P5,000,000 is P250,000. Maximum) P200,000 Other claims against the estate 600,000 Total P800,000 Deductions (P2,000,000/P5,000,000 x P800,000) P320,000 eee A non-resident, not citizen of the Philippines, is not allowed: (a) Deduction for family home; (b) Standard deduction; (c) Deduction for medical expenses; and (d) Deduction for amount receivable under Republic Act No. 4917. (Author's query: Under the original revenue regu- lation on estate tax, unpaid medical expenses on the last illness of the decedent were allowable as “funeral expenses”. With the insertion into the law of the new deduction for “medical expenses”, unpaid expenses of the last illness ceased to be funeral expenses or claims against the estate. But “medical expenses” is a special deduction only for the estate of a resident or citizen of the Philippines. Since the estate of a non-resident, not citizen of the Philippines, is not allowed a deduction for medical expenses, can his estate avail of unpaid medical expenses as “funeral expenses” under the original reve- nue regulation, or as claim against the estate?)