FS2223-ESTATETAX-05

BSA 2105 Atty. F. R. Soriano

ESTATE TAX

COMPUTATION OF GROSS ESTATE,

DEDUCTIONS FROM THE GROSS ESTATE,
AND NET TAXABLE ESTATE OF
A SINGLE/UNMARRIED CITIZEN OR RESIDENT ALIEN DECEDENT

Pro-forma formula in determining taxable estate of single/unmarried decedent (who was a citizen or
resident alien decedent)
(Indicate description of each property to be
included in the gross estate) P xxx
Gross estate xxx

Less: Ordinary deductions

Claims against the estate P xxx
Claims against insolvent persons xxx
Unpaid mortgage xxx
Taxes xxx
Losses xxx
Transfer for public use xxx
Vanishing deduction (See Schedule) xxx
Total ordinary deductions xxx

Special deductions
Family home xxx
Standard deduction xxx
Amount received under RA 4917 xxx
Total special deductions xxx xxx

Net taxable estate P xxx

ORDINARY DEDUCTIONS

Claims against the estate

Claims against the estate refer to obligations of the decedent that could have been enforced during his
lifetime.
1. If the claim against the estate arose out of a debt instrument (such as promissory note or contract of
loan), the same must be notarized (except for loans granted by financial institutions where
notarization is not part of the business practice the financial institution-lender.) If the loan was
contracted within three years before the death of the decedent, the executor or administrator must
submit a statement under oath showing the disposition of the proceeds of the loan.

2. If the obligation arose from the purchase of goods or services, there must be a duly notarized
certification from the creditor as to the unpaid balance of the debt, including interest as of time of
death.

3. If the settlement was made through the court in a testate or intestate proceeding, there should be
court order approving the claim against the estate.

Claims against insolvent persons

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These refer to receivables from persons whose assets are insufficient to pay their debts, otherwise
known as “bad debts”. In order that the estate may avail itself of the bad debt as a deduction, the entire
amount of the receivable must first be shown as part of the gross estate. If the amount is totally
uncollectible, the entire amount is shown as a deduction. If the amount is partially uncollectible, the
portion that cannot be collected is shown as deduction.
Illustration: Mr. A died leaving an estate which includes a receivable from Mr. X in the amount of
P100,000.00. Mr. X had assets amounting to P2,000,000.00 and liabilities of P5,000,000.00 including his
debt to Mr. A amounting to P100,000.00. How much may be claimed as a deduction by the estate of Mr.
A?

Answer: P60,000.00 (P3,000,000.00*/P5,000,000.00 x P100,000.00) *The portion of the liabilities

that could not be paid by X (P5,000,000.00-P2,000,000.00 = P3,000,000.00)
Supposing that the liabilities of Mr. X include unpaid taxes to the government (a preferred creditor
under the law who must be paid first by Mr. X) in the amount of P200,000.00. How much may be claimed
by the estate of Mr. A as deduction?
Answer: P62,500.00. (P3,000,000.00/P4,800,000.00 x P100,000.00 = P62,500.00). Supporting
computations: (P2,000,000.00-200,000.00 = P1,800,000.00, the remaining assets of Mr. X after payment
of the taxes to the government.) (P5,000,000.00-200,000.00 = P4,800,000.00, the liabilities of Mr. X to
other creditors including Mr. A.) (P4,800,000.00-P1,800,000.00 = P3,000,000.00, the portion of the
liabilities of Mr. X, which includes his debt to Mr. A, that could not be paid by Mr. X.)

Unpaid mortgage or indebtedness on property

This refers to encumbrance on property to secure a debt. The mortgage may be a chattel mortgage
(if constituted on personal property), or real mortgage (if constituted on real property.) In order that the
unpaid mortgage may be claimed as deduction, the FMV of the property (undiminished by the unpaid
mortgage) must be included in the gross estate.

Taxes

For taxes to be deductible, they must have accrued and remained unpaid at the time of death of the
decedent. The following are the taxes which, by law, are not deductible from the gross estate: (1) Income
taxes on income received after death; (2) Property taxes which have not accrued prior to the death of the
decedent; and (3) Estate tax due on the transmission of the estate.)
(Note: Under Sec. 246 of the Local Government Code, real property taxes accrue on January 1st of
each year even if they are payable after the decedent’s death, such as when the owner prefers to pay the real
property tax in quarterly installments.)

Losses

The following requirements must be complied with in order that losses may be claimed as deduction
from the gross estate:
1. The FMV of the property lost must have been included in the gross estate.

2. The loss arose from fires, storms, shipwreck, or other casualties, or from robbery, theft or
embezzlement.

3. The loss was incurred (after death) during the settlement of the estate and not later than the last day
for the payment of the estate tax. (Note: The estate tax return shall be filed within one (1) year from
the decedent’s death, and the estate tax shall be paid, as a rule, at the time the return is filed by the
executor, administrator or heir.)

4. The loss was not compensated by insurance or otherwise.

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5. The loss was not claimed as a deduction from the gross income of the estate. (An estate under
judicial settlement is a taxpayer and may claim the loss as a deduction from its gross income. Thus,
the loss may be claimed either as a deduction from gross estate or from gross income. The loss can
be claimed only once.)

Transfer for public use

Transfer for public use can be claimed as deduction if the disposition was provided in the will of the
decedent. The amount deductible shall be the entire amount of all bequests, legacies, devises or transfers to
or for the use of the Government of the Philippines or any political subdivision thereof (i.e., provinces,
cities, municipalities and barangays), exclusively for public purposes.
`
Note: Under the TRAIN Law, funeral expenses and judicial expenses are no longer considered as Ordinary
Deductions for the purpose of computing the net taxable estate. However, they may still be deducted in
computing the hereditary estate.

Vanishing deduction (otherwise known as “property previously taxed”)

This is a deduction from the gross estate for property received by the decedent, either by donation or
succession, within five (5) years prior to his death. The purpose of the deduction is to ease the burden of
taxation on the same property within a relatively short period of time, because the transfer tax is imposed
on each transfer.
The following requirements must be complied with in order that the vanishing deduction can be
claimed as deduction from the gross estate:
1. The present decedent died within five (5) years from the time he received the property, either by
donation or succession.

2. The property on which the vanishing deduction is being claimed must be situated in the Philippines.

3. The property must have formed part of the taxable estate of the prior decedent (if the property was
received by succession) or the taxable gifts of the donor (if the property was received by donation.)

4. The estate tax or the donor’s tax imposed on the first transfer must have been finally determined and
paid.

5. The property can be identified as the one received from such prior decedent or from the donor, or
which can be identified as having been acquired in exchange therefor.

6. No vanishing deduction was claimed in the estate of the prior decedent, if the property was acquired
by succession, for the same property.

Schedule in computing vanishing deduction

Initial value P xxx
Less: Mortgage assumed and paid by the present decedent xxx
Balance xxx
Less: Proportionate deduction
Balance/Gross estate x Total ordinary deductions xxx
Basis of vanishing deduction xxx
Multiplied by appropriate rate %
Vanishing deduction P xxx
Notes:
1. The initial value is the FMV in the prior estate (if property was received by succession) or the FMV
in the taxable gifts of the donor (if the property was received by donation), or the FMV in the estate
of the present decedent, whichever is lower.
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2. The mortgage was a deduction from the gross estate of the prior decedent or gross gifts of the donor,
and assumed by the present decedent. The deduction from the initial value refers to the mortgage
paid by the present decedent. (A mortgage debt incurred by the present decedent after he received
the property even if paid in whole or in part by him is not deductible in computing the balance.)

3. In case no mortgage was assumed by the present decedent, the numerator in determining the
proportionate deduction shall be the initial value.

4. The appropriate rate to be applied is determined by the length of time from the time the property
was received by the present decedent up the time of his death, as shown below. If the property
was received:
a. Not more than one year before the death of the present decedent – the rate to be applied is
100%.
b. More than one year but not more than two years – 80%.
c. More than two years but not more than three years – 60%.
d. More than three years but not more than four years – 40%.
e. More than four years but not more than five years – 20%

SPECIAL DEDUCTIONS

Family home
The family home can be claimed as a special deduction from the gross estate even if the decedent
was unmarried if he/she was head of family. Unmarried head of family refers to an unmarried or legally
separated man or woman with one or both parents, or with one or more brothers or sisters, or with one or
more or more legitimate, recognized natural or legally adopted children living with and dependent upon
him or her for their chief support, where such brothers sisters or children are not more than 21 years of age,
unmarried and not gainfully employed or where such children, brothers or sisters, regardless of age are
incapable of self-support because of physical or mental defect, or with any of the beneficiaries mentioned
in Article 154 of the Family Code who is living in the family home and dependent upon the head of the
family for chief support (i.e., parents, ascendants, descendants, brothers and sisters, whether the
relationship be legitimate or illegitimate.)
The requirements for deductibility of family home are as follows:

1. The family home must be the actual residential home of the decedent and his family at the time of his
death, as certified by the Barangay Captain of the locality where the family home is situated.

2. The total value of the family home must be included as part of the gross estate of the decedent.

3. The amount deductible is the FMV at the time of death or P10,000,000.00, whichever is lower.

(Note: For the purpose of this deduction, a person may constitute only one family home.)

Standard deduction
This deduction is equivalent to P5,000,000.00. No substantiation is required in order that it may be
claimed as deduction. (Note: The increase in the Standard Deduction from P1,000,000.00 to
P5,000,000.00 under the TRAIN Law is meant to cover funeral expenses, judicial expenses and medical
expenses which are no longer deductible in computing the net taxable estate.)

Amount received by the heirs under Republic Act No. 4917

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This refers to any amount received by the heirs from the decedent’s employer as a consequence of
the death of the decedent-employee. The amount of the separation benefit must be included as part of the
gross estate in order that this deduction may be claimed.

Note: Medical expenses are no longer part of special deductions under the TRAIN Law to arrive at the net
taxable estate. However, these may still be deductible to arrive at the hereditary estate.

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