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MODULE 4 : INCOME TAX ON INDIVIDUALS – PART 2  P50,000, regardless of status

 In case of married individuals where only one of the
LEARNING OBJECTIVES spouse is deriving gross income, only such spouse
At the end of this module you are expected to; shall be allowed personal exemption
2. Additional Personal Exemptions (APE)
1. Identify the different classification of individual taxpayers;  P25,000 for each qualified dependent child
2. Identify who among the individual tax payers are classified as (maximum of 4 dependents)
ordinary taxpayers or special taxpayers;  Allowed to single or married taxpayer
3. Define what is income for tax purposes;
4. Identify the classification and taxability of income;  Qualified Dependent
5. Identify the procedures required for claiming personal
exemptions; Legitimate, illegitimate, or legally adopted
6. Compute the individual income tax child – dependent for chief support and not
Taxable Income living with taxpayer who is:
a. Not more than 21 years old
- These are pertinent items of gross income enumerated in the Tax b. Unmarried
Code less the deductibles, if any, and/or personal exemptions c. Not gainfully employed
authorized by law. d. If such dependent, regardless of
- Amount of income upon which the tax rate prescribed by law is age, is incapable of self- support
applied to obtain the amount of income tax payable because of mental or physical
- Gains, profits or income which are subject to income tax either at defect
gross or net amount - For husband and wife:
 Only one of the spouses may claim additional
Requisites for Income to Be Taxable
exemption
1. There must be gain or profit  As a rule, husband is the proper claimant (being the
2. The gain must be realized or received – whether actual realization head of the family)
or constructive receipt  The wife may claim additional exemption if:
3. The income earned must not be exempted from income taxation  Husband explicitly waives his right in favor of
his wife
Personal Exemptions
 Husband has no income
- These are arbitrary amounts allowed by law to be deducted from  Husband works abroad and has no taxable
income to cover the personal living or family expenses of the income in the Philippines
taxpayer. - For legally separated spouses:
 Proper claimant is the spouse who has custody of the
Kinds of Personal Exemptions child/children and the total amount of additional
1. Basic Personal Exemptions (BPE)
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exemption shall not exceed the allowed maximum
amount 2. Reaches 21 years old – P25,000 None
normal child
Change in Status 3. Reaches 21 years old – P25,000 P25,000
1. If during the taxable year, the taxpayer marries or have additional abnormal child and
incapable to support
dependents, the taxpayer may claim the corresponding personal or
himself
additional exemption in full for such year. 4. Marries P25,000 None
2. If the taxpayer dies during the taxable year, his estate may still claim 5. Gainfully employed P25,000 None
personal exemptions for himself and additional exemptions for 6. Dies P25,000 None
dependents as if he died at the close of such year.
3. If during the taxable yea, the qualified dependent marries, or
becomes 21 years old, or become gainfully employees, the taxpayer
may still claim the same exemptions as if any of the above happened Premium Payments on Health and/or Hospitalization Insurance
at the close of such year. (HHIP)
4. If the spouses, with qualified dependent children, became legally
separated during the taxable year, their combined additional - This is allowed as a deduction from gross income, provided the
exemptions should not exceed the maximum amount of taxpayer has met the following provisions:
P100,000 (four qualified dependents x P25,000) 1. The insurance shall be taken out by the individual taxpayer for
5. If there are no specific rules applicable from those above mentioned, himself or for his family
the status of the taxpayer at the end of the year shall determine 2. The family gross income is not more than 250,000 for the
personal exemptions taxable year.
This includes primary income and other income from
CHANGE OF STATUS SUMMARY sources received by all members of nuclear family (father,
mother, unmarried children living together as household,
INDIVIDUAL TAXPAYER BASIC PERSONAL EXEMPTION single parent with children, single person living alone)
3. The spouse claiming additional exemption for qualified dependents
Change of Status: This Year Next Year shall be the same spouse to claim the deductions for premium
1. Married P50,000 P50,000 payments
2. Died P50,000 – the None Whose Taxpayer Can Claim Allowable Exemptions (Personal
estate claims
Exemptions and HHIP)?

QUALIFIED DEPENDENT ADDITIONAL EXEMPTION

Change of Statues: This Year Next Year
1. Born P25,000 P25,000

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BPE APE HHIP
1. RC Allowed Allowed Allowed
2. NRC Allowed Allowed Allowed
3. RA Allowed Allowed Allowed

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4. NRA-ETB Allowed Allowed Not Allowed  his common law wife No
with
 his physically disabled brother, minor, No
Reciprocity
unemployed
5. NRA-ETB Not Allowed Not Allowed Not Allowed
 his parents who are chiefly dependent No
without
and living with him
Reciprocity
6. NRA-NETB Not Allowed Not Allowed Not Allowed
Total number of qualified dependents = 5 Tax
Code only allowed up to maximum of 4
Reciprocity So, total additional exemptions is P100,000 (P25,000 each x 4)
- The foreign country of an NRA_ETB allows personal
exemptions to citizens of the Philippines not residing therein. Personal Exemptions
Basic Personal Exemption P 50,000
Amount of allowable deduction to NRA-ETB with Reciprocity Additional Personal Exemption 100,000
The amount of exemption shall be the: Total P 150,000
 amount allowed in his country, or whichever is LOWER
 amount allowed under the Tax Code of the Philippines CASE 2

A taxpayer, married with two (2) qualified dependent children, had the
ILLUSTRATION following data for the current taxable year:
CASE 1
Gross income, Philippines P650,000
Juan Dela Cruz, married, had the following dependents during the Gross income, abroad 250,000
current taxable year: Expenses, Philippines 150,000
 four legitimate minor children Expenses, abroad 130,000
 recognized natural child with current common law wife
 his common law wife Question 1: How much is the taxable income assuming the taxpayer is a
 his physically disabled brother, minor, unemployed resident citizen?
 his parents who are chiefly dependent and living with him
Answer: P520,000
Question: How much is the total personal exemptions of the taxpayer?
Solution:
Answer: P150,000
Solution: Gross Income
Qualified Dependent Gross income, Philippines P 650,000
Gross income, abroad 250,0000 P 900,000
 four legitimate minor children Yes
 recognized natural child with current Yes
common law wife
Less: Business Expenses
Expenses, Philippines P 150,000
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Expenses, abroad 130,000 P 280,000
P 620,000
Net Income
Less: Personal Exemption
Basic Personal Exemption P 50,000
Additional Personal Exemption 50,000 100,000
Taxable Income P 520,000

Since the taxpayer is a resident citizen, he is taxable for all income

earned both in the Philippines and abroad. As to personal
exemptions, a resident citizen is allowed for P50,000 basic personal
exemption as well as additional exemptions amounting to P50,000,
calculated as P25,000 per qualified dependent multiplied by two (2)
qualified dependent children.

Question 2: How much is the taxable income assuming the taxpayer is a

nonresident citizen?

Answer: P400,000

Solution:
Gross income, Philippines P 650,000
Less: Expenses, Philippines 150,000
Net Income P 500,000
Less: Personal Exemptions
Basic Personal Exemption P 50,000
Additional Personal Exemption 50,000 100,000
Taxable Income P 400,000

A non-resident citizen is taxable for income earned in the

Philippines only. As to personal exemptions, a non-resident citizen
is allowed for P50,000 basic personal exemptions as well as
additional exemptions amounting to P50,000.

Question 3: How much is the taxable income assuming the taxpayer is a

resident alien?
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Answer: P400,000

Solution: (same solution as provided in Question 2)

Question 4: How much is the taxable income assuming the taxpayer is a

non-resident alien engaged in trade or business in the Philippines? Assume
further that his country allows personal exemptions to Filipinos not
residing therein as follows: Basic exemptions – P60,000; Additional
exemption P20,000 per child.

Answer: P410,000

Solution:
Gross income, Philippines P 650,000
Less: Expenses, Philippines 150,000
Net Income P 500,000
Personal Exemptions
Basic Personal Exemption* P 50,000
Additional Personal Exemption 40,000 90,000
Taxable Income P 410,000

*50,000 is lower than those allowable by the foreign country of

P60,000
*20,000 per child is lower than the additional exemption allowable in
the Philippines (P20,000 x 2) = F

A non-resident alien engaged in trade or business (NRA-ETB) is

taxable for income earned in the Philippines only. As to personal
exemptions, a NRA-ETB is allowed to claim basic personal
exemption and additional exemptions provided that there is a
reciprocity clause.

In this case, the taxpayer’s country and the Philippines has an

existing reciprocity clause, so the taxpayer is allowed to claim such
personal exemptions on the lower amount between what his
country
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Additional personal exemption xxx

Question 5: How much is the taxable income assuming the taxpayer is a Premium payment for health and/or xxx (xxx)
non-resident alien engaged in trade or business in the Philippines? Hospitalization insurance
Taxable Compensation Income Pxxx
Answer: P500,000
Tax Due Pxxx
Solution: Less: Creditable withholding taxes
Gross income, Philippines P 650,000 Prior year’s excess credit Pxxx
Less: Expenses, Philippines 250,000 Tax payments for the previous quarters xxx
Net Taxable Income P 500,000 Tax withheld at source xxx
Foreign income tax credit xxx (xxx)
Since the foreign country of a NRA-ETB does not allow personal Tax Payable (refundable) Pxxx
exemptions to citizens of the Philippines not residing therein, such
NRA-ETB is not allowed to claim personal exemptions.
III. MIXED INCOME EARNER
Gross compensation income Pxxx
Gross business/professional income xxx
Pro Forma Computation of Taxable Income Total Income xxx
Less: Allowable business expenses Pxxx
I. PURE COMPENSATION INCOME EARNER Basic personal exemption xxx
Additional personal exemption xxx
Gross compensation income Pxxx Premium payment for health and/or xxx (xxx)
Less: Basic personal exemption Pxxx Hospitalization insurance
Additional personal exemption Xxx Taxable Compensation Income Pxxx
Premium payment for health and/or xxx (xxx)
Hospitalization insurance Tax Due Pxxx
Taxable Compensation Income Pxxx Less: Creditable withholding taxes
Tax withheld on compensation Pxxx
Tax Due Pxxx Prior year’s excess credit xxx
Less: Tax withheld on compensation (xxx) Tax payments for the previous quarters xxx
Tax Payable (refundable) Pxxx Tax withheld at source xxx
Foreign income tax credit xxx (xxx)
Tax Payable (refundable) Pxxx

II. PURE BUSINESS INCOME EARNER

Gross compensation income Pxxx
Less: Allowable business expenses Pxxx
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Basic personal exemption xxx

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GRADUATED OR SCHEDULAR RATE (SECTION 24A of the Tax Code amount of taxable income is in the “over P500,000” bracket, the tax
Over But not over Tax Plus Of excess over due is calculated as follows:
- 10,000 0 5% 0 Tax Bracket TAX DUE
10,000 30,000 500 10% 10,000 Additional Tax Total
30,000 70,000 2,500 15% 30,000 Tax Plus Of excess over Total
Over
70,000 140,000 8,500 20% 70,000 P500,000 P500,000
140,000 250,000 22,500 25% 140,000 125,000 32% 2,950,000 944,000 1,069,000
250,000 500,000 50,000 30% 250,000
500,000 - 125,000 32% 500,000
Additional Tax P3,450,000 -P500,000 =
P2,950,000*32% = P944,000

ILLUSTRATION Initial Tax 125,000

Additional Tax 944,000
Use the following data for the questions 1-5
Total Tax Due 1,069,000

An individual tax payer provided the following information 2. Taxable Income P 1,950,000
Tax Due 589,000
Gross business income, Philippines 5,000,000
Gross business income, Canada 2,000,000 Tax Bracket TAX DUE
Gross business income, Singapore 1,000,000 Additional Tax Total
Business expenses, Philippines 3,000,000 Tax Plus Of excess over Total
Over
Business expenses, Canada 1,000,000 P500,000 P500,000
Business expenses, Singapore 500,000 125,000 32% 1,450,000 464,000 589,000

Additional Tax P1,950,000-P500,000 =

Determine the taxable income as well as the tax due assuming: P1,450,000*32% = P589,000
1. The taxpayer is a resident citizen
Initial Tax 125,000
2. The taxpayer is a nonresident citizen Additional Tax 464,000
3. The tax payer is a resident alien Total Tax Due 589,000
4. The taxpayer is a nonresident alien engaged in trade or
business 3. Taxable Income P 1,950,000
5. The taxpayer is a nonresident alien not engaged in trade or Tax Due 589,000
business
Answer: Tax Bracket TAX DUE
1. Taxable Income P 3,450,000 Additional Tax Total
Tax Plus Of excess over Total
Tax Due 1,069,000 Over
P500,000 P500,000
125,000 32% 1,450,000 464,000 589,000
By using the graduated or scheduler rate tax table, the tax due can
be calculated by determining first the taxable income and then
Additional Tax P1,950,000-P500,000 =
locating on the table of which bracket it can be classified. Since the
P1,450,000*32% = P589,000

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Initial Tax 125,000

Additional Tax 464,000
Total Tax Due 589,000

4. Taxable Income P 2,000,000

Tax Due 605,000

Tax Bracket TAX DUE

Additional Tax Total
Tax Plus Of excess over Total
Over
P500,000 P500,000
125,000 32% 1,500,000 480,000 605,000

Additional Tax P2,000,000-P500,000 =

P1,500,000*32% = P605,000

Initial Tax 125,000

Additional Tax 480,000
Total Tax Due 605,000

5. Taxable Income P 1,950,000

Tax Due 589,000

Taxable Income P 5,000,000

Tax rate 25%
Tax Due P 1,250,000

A taxpayer who is classified as a nonresident alien not engaged in

trade or business is taxable in its gross income and subject to a fix
tax rate of 25%

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ILLUSTRATION
Case A:
The income and expenses of a Filipino citizen for the current
taxable year were summarized as follows:
January to June:
Philippines Canada Gross
income P 5,000,000 2,000,000
Allowable deductions 2,000,000 1,000,000
Net income 3,000,000 1,000,000

July to December:
Philippines Canada Gross
income P 2,000,000 3,000,000
Allowable deductions 1,000,000 1,200,000
Net Income 1,000,000 1,800,000

Assume the taxpayer is a resident who left the country in July of the
current year to reside permanently in Canada, his taxable income
as well as tax due is:

Answer:
Taxable Income P 4,950,000
Tax Due 1,549,000

From January to June, the taxpayer is classified as a resident

citizen, hence, he is taxable for income earned both in the
Philippines and in Canada. For the income earned from July to
December, only the portion of income earned from the Philippines is
taxable since starting July, he is already classified as a non-resident
citizen.

January to June:
Philippines Canada Total
Gross income P 5,000,000 2,000,000 7,000,000
Allowable deductions 2,000,000 1,000,000 3,000,000

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July to December: January to June:

Philippines Canada Total Philippines Canada Total
Gross income P 2,000,000 - 2,000,000 Gross income P 5,000,000 - 5,000,000
Allowable deductions 1,000,000 - 1,000,000 Allowable deductions 2,000,000 - 2,000,000
Net Income 1,000,000 - 1,000,000 Net income 3,000,000 - 3,000,000
Total Gross Taxable Income 4,000,000 1,000,000 5,000,000 July to December:
Philippines Canada Total
Less: Allowable Deductions Gross income P 2,000,000 3,000,000 5,000,000
Basic Personal Exemptions 50,000 Allowable deductions 1,000,000 1,200,000 2,200,000
Additional Personal Exemptions - Net Income 1,000,000 1,800,000 2,800,000

Net Taxable Income 4,950,000 Total Gross Taxable Income 4,000,000 1,800,000 5,800,000

Tax Less: Allowable Deductions

TAX DUE Basic Personal Exemptions 50,000
Bracket
Additional Tax Total Additional Personal Exemptions -
Tax Of excess
Over Plus Total Net Taxable Income 5,750,000
over
P500,000 P500,000
125,000 32% 4,450,000 1,424,000 1,549,000 Tax
TAX DUE
Bracket
Additional Tax Total
Additional Tax P4,950,000-P500,000 =
P4,450,000*32% = P1,549,000 Tax Of excess
Over Plus Total
over
P500,000 P500,000
Initial Tax 125,000
Additional Tax 1,424,000 125,000 32% 5,250,000 1,680,000 1,805,000
Total Tax Due 1,549,000
Additional Tax P5,750,000-P500,000
Case B: =P5,250,000*32% = P1,805,000
Assume the same data in case A except that the taxpayer is a
Initial Tax 125,000
nonresident citizen who returned and reside permanently in the country Additional Tax 1,680,000
in July of the current year. His taxable income as well as tax due is: Total Tax Due 1,805,000

Answer: • End of Module 4 •

Taxable Income P 5,750,000
Tax Due 1,805,000

From January to June, the taxpayer is classified as a non-resident

citizen, and from July to December, the taxpayer is already
classified
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Links to Supplemental Readings

1. https://www.chanrobles.com/legal6nircmain,htm#.WW14qRUr LIU
2. https://www.bir.gov.ph/index.php/tax-code.html#title1
3. https://www.bir.gov.ph/index.php/tax-code.html#title2

Links to Other Video Lectures

1. https://www.youtube.com/watch?v=fACOZo7hTaQ