Chapt-11 Income Tax - Individuals

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)Chapter 11: Income Tax of Individuals

CHAPTER 11INCOME TAX OF INDIVIDUALSProblem 11 – 1 TRUE OR FALSE

1. False – Qualified dependent parents and siblings are not entitled for additional exemption.

2. False – must be more than 180 days.3. False – NRA NBT are not allowed for personal exemptions.4. True5. True6. True7. True8. True9. True10. True11. False – No personal exemption is allowed to NRANEBT.12. True

Problem 11 – 2 TRUE OR FALSE1. False – additional exemptions are allowed only for qualified dependent children.2. False – not payment for hospitalization but payment of premium for health and

hospitalization insurance provided that the family income does not exceed P250,000 per year.

3. True4. False – 15% of gross income5. False – creditable withholding income tax.6. False – qualified dependent parent and siblings are not entitled for additional

exemption.7. False – Tax credit of income taxes paid outside the Philippines is allowed only for

resident Filipino citizen.8. False – The creditable withholding tax is 15%.9. False – Gross income includes other income but not compensation income.10. False – Tax-exempt11. True12. True

Problem 11 – 3 Problem 11 – 4 Problem 11 – 51. D 1. D 1. Not in the choices. P25,000 per child (R.A. 9504)2. D 2. B 2. Not in the choices. P50,000 basic (R.A. 9504)3. A 3. C 3. B4. A 4. A 4. C5. A 5. B 5. B6. B 6. D 5. B7. D 7. B 6. A, B & C8. C 8. B 7. D9. C 9. B 8. D10. B 10. A 9. D

10. C

Problem 11 – 6 AIncome from the Philippines (P10,000 x 12) P120,000Less: Personal exemption – single 50,000 Income subject to tax in the Philippines P 70,000

Note: It is assumed that Juan works as OFW for more than 183 days. Income earned by OFW outside the Philippines is not subject to tax in the Philippines. The income from the sari-sari store in the Philippines is earned from January to December of the taxable year.

Problem 11 – 7 CGross compensation income – Philippines (P250,000 x 12) P3,000,000Multiplied by special income tax rate 15% Income tax payable P 450,000

Problem 11 – 8 ABasic personal exemption of couple: Husband P50,000 Wife 50,000Additional exemptions: 4 qualified dependent children (P25,000 x 4) 100,000 Maximum amount of personal exemption P200,000

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Problem 11 – 9 COnly P50,000 basic personal exemption because the taxpayer’s category is single.

Problem 11 – 10 BBasic personal exemption – Married P50,000Additional exemption 25,000 Total personal exemptions P75,000

Problem 11 – 11 CBasic personal exemption P50,000Additional exemption (a & b only) (P25,000 x 2) 50,000 Total personal and additional exemptions P100,000

Problem 11 – 12 ABasic personal exemption – married P 50,000Nonresident alien engaged in business in the Philippines is allowed of basic personal exemption subject to limit, but additional exemption is not allowed. Personal exemptions for foreigners are subject to the rule of reciprocity with limit of whichever is lower.

Problem 11 – 13 AP200 per month. For the month of December only.

Problem 11 – 14 DNo special deduction is allowed. The family income exceeding P250,000 is not allowed for a special deduction for health insurance.

Problem 11 – 15 DZero. Maria has no income.

Problem 11 – 16 ANo net tax payable at the end of the taxable year because the senior citizen’s income does not exceed P60,000 during the year. The tax withheld from interest income is final tax.

Problem 11 – 17

Subject to1. Not in the choices = P790,000 & P160,000 Tabular tax Final tax

Compensation income P240,000Business and other income: Professional income (P300,000 + P200,000) 500,000 Interest income – without 60,000 Dividend income – without 40,000 Total net income before personal exemption P840,000Less: Basic personal exemption – single ( 50,000)Net income to ITR – tabular tax P790,000

Interest income within P100,000Dividend income within 60,000 Income subject to final tax P160,000

2. ACompensation income P240,000Business income: Professional income 300,000 Total net income before personal exemption P540,000Less: Basic personal exemption – single 50,000 Net income to ITR – tabular tax P490,000


Note: The problem is silent as to whether the taxpayer opted for OSD, hence, OSD should not be deducted from the business gross income. In order to qualify for OSD, the taxpayer should indicate in his return that he is opting OSD instead of itemized deductions. (Sec. 34 (L), NIRC)

Alternative Solution of Prob. 11-17: If X opted to use OSDSubject to

1. A Tabular tax Final taxCompensation income P240,000

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Business and other income: Professional income (P300,000 + P200,000) 500,000 Interest income – without 60,000 Dividend income – without 40,000 Total business and other income P600,000 Less: OSD (P600,000 x 40%) ( 240,000) Net business income P360,000Total net income before personal exemption P600,000Less: Basic personal exemption – single ( 50,000)Net income to ITR – tabular tax P550,000


2. Not in the choices = P370,000 & P160,000Compensation income P240,000Business income: Professional income, net of OSD (P300,000 x 60%) 180,000 Total net income before personal exemption P420,000Less: Basic personal exemption 50,000 Net income to ITR – tabular tax P370,000


Problem 11 – 18 DHusband Wife

Net taxable income P140,000 P250,000Income tax P 22,500 P 50,000Less: Withholding tax 20,000 45,000 Net tax payable P 2,500 P 5,000

Problem 11 – 19 DCompensation as researcher P 600,000Less: Personal exemption – married 50,000 Net taxable compensation income P 550,000

Tax on P500,000 P125,000Tax on excess (P50,000 x 32%) 16,000 Total income tax from compensation P141,000Dividend income tax (P120,000 x 10%) 12,000Interest income tax (P500,000 x 7.5%) 37,500 Total income tax due P190,500

Problem 11 – 20 DCapital gains tax on shares of stock (P80,000 x 5%) P 4,000Capital gains tax on sale of land (P2,000,000 x 6%) 120,000 Total capital gains tax paid P124,000

Problem 11 – 21 B1. B

Final tax on copyright royalty (P11,250/90%) x 10% P 1,250Final tax on mineral claim royalty (P12,000/80%) x 20% 3,000Final tax on share from trading partnership as dividend (P270,000/90%) x 10%

30,000

Total final tax P34,250

2. Not in the choices None. All reported earnings are subject to final tax.

Problem 11 – 22 BPercent of service 100%Add: Output VAT 12% Total 112%Less: Withholding tax 20% Percent of net proceeds 92%

Net proceeds P 92,000Divided by percent of net proceeds 92% Service fee P100,000

Withholding tax (P100,000 x 20%) P 20,000

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VAT (P100,000 x 12%) P 12,000

Problem 11 – 231. A

Salaries of assistantsTraveling expensesLight and water, OfficeStationeries and suppliesOffice rentTotal expenses before contributionAdd: Contribution subject to limit (P500,000 – P176,850) x 10%Total allowable deductions

P 96,00011,000

7,8901,960

60,000 P176,850 32,315 P209,165

2. CProfessional feesLess: Allowable deductionsNet income from businessAdd: Income from compensation: Allowance as director of Corporation A CommissionsNet income before personal and additional exemptions

P25,000 5,000

P500,000 209,165 P290,835

30,000 P320,835

3. DNet income before personal and additional exemptionsLess: Personal and additional exemptions: Basic – widower Additional exemptions (P25,000 x 3 qualified children)Net taxable income

P 50,000 75,000

P320,835

125,000 P195,835

Tax on P140,000Tax on excess (P55,835) x 30%Income tax due

P 22,500 13,959

P 36,459

Problem 11 – 241. P164,200

Net worth, December 31, 2009Less: Net worth, December 31, 2008Unadjusted Net income for year 2009Add back: Non-deductible expenses Contributions (P20,000 + P50,000)Total Less: Non-taxable incomeIncome before contributionLess: Contributions: Deductible in full With limit Actual, P50,000 Limit, P268,000 x 10% = P26,800 AllowedNet income before personal exemptionsLess: Personal exemptions (P50,000 +p100,000)Net taxable income

P 20,000

26,800

P375,000 325,000 P 50,000150,000

70,000 P270,000 2,000 P268,000

46,800 P221,200 150,000 P 71,200

2. P140,000Corrected net taxable incomeLess: Reported net income subject to taxUnreported taxable income

P 71,200 24,200 P 47,000

Problem 11 – 251. Itemized deduction

Compensation incomeGross income from businessLess: Itemized deductionTotal income before personal exemptionsLess: Personal exemptions Basic personal exemptions Additional exemptions (P25,000 x 4)Taxable income

P 400,000 150,000

P 50,000 100,000

P 20,000

250,000 P270,000

150,000 P120,000

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Computation of income tax:Tax on P70,000Tax on excess (P50,000) x 20%Income tax before withholding taxLess: Withholding taxIncome tax due and payable

P 8,500 10,000 P 18,500

1,000 P 17,500

2. Optional standard deductionCompensation incomeGross income from businessLess: Optional standard deduction (40%)Total income before personal exemptionsLess: Personal exemptions Basic personal exemptions Additional exemptions (P8,000 x 4)Taxable income

P 400,000 160,000

P 50,000 100,000

P 20,000

240,000 P260,000

150,000 P110,000

Computation of income tax:Tax on P70,000Tax on excess (P40,000 x 20%)Income tax before withholding taxLess: Withholding TaxIncome tax due and payable

P 8,500 8,000 P 16,500

1,000 P 15,500

Problem 11 – 262010 net income from businessCapital gains transactions Short term capital gains (P40,000 x 100%) Long term capital gains (P30,000 x 50%) Short term capital loss (P10,000 x 100%) Capital gains Less: 2009 Capital loss carry over – limit Income before personal exemptions Basic personal exemption- married Additional exemption (P25,000 x 3)Taxable income, 2010

P 40,00015,000

(10,000) P45,000

35,000

P 50,000 75,000

P 600,000

10,000 P 610,000

125,000 P 485,000

Note: The applicable capital loss carry-over should only be limited to P35,000, because it should not exceed the net income from operation of such year (Sec. 39D, NIRC).

Problem 11 – 271. Compensation income (P240,000 + P30,000) P270,000

Less: Personal exemption (P50,000 + P25,000) 75,000 Net taxable compensation P195,000Business income P100,000Less: Business expenses 120,000 Net loss from business (P20,000) 0 - Net taxable income P195,000

2. Tax on P140,000 P22,500Tax on excess (P55,000 x 25%) 13,750 Income tax due P36,250Less: Tax credit 30,000 Income tax still due and payable P 6,250

Problem 11 – 281. Salary (P30,000 x 12) P360,000

Add: Taxable 13th month pay (P35,000 – P30,000) 5,000 Total P365,000Less: SSS contribution P3,000 Medicare/Philhealth contribution 2,000 5,000 Taxable compensation income before personal exemption

P360,000

Less: Personal exemption 50,000 Net taxable compensation income P310,000

Estimated income tax due:Tax on P250,000 P50,000

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Tax on excess (P60,000 x 30%) 18,000 Total income tax due per year P68,000Divided by number of months in a year 12 Monthly withholding tax P 5,667

2. Quarterly business income taxBusiness income per quarterLess: Business expense per quarterNet income per quarter

Tax on P70,000Tax on excess (P10,000 x 20%)Quarterly business income tax first quarter to third quarter

P200,000 120,000 P 80,000

P 8,500 2,000 P 10,500

Problem 11 – 291. Entertainment fee (P1,700,000/85%) P2,000,000

Business income Philippines 500,000 Japan 1,000,000Net income before personal exemption P3,500,000Less: Personal exemption - basic P50,000 Additional (P25,000 x 4) 100,000 150,000 Net taxable income P3,350,000

Note: The OSD is not used because the problem is silent that the taxpayer opted to utilize it. OSD is allowed only if the taxpayer indicated in his return that he is using it otherwise he is using itemized deduction. If the taxpayer did not indicate that he is using OSD and at the same time he has no itemized deduction, he cannot deduct expenses from his gross business income. (Sec. 34 (L), NIRC)

2. Tax on P500,000 P 125,000Tax on excess (P2,850,000 x 32%) 912,000 Income tax due P1,037,000

3. Tax creditCreditable withholding tax on fees (P2,000,000 x 15%) P300,000Business income tax paid - Philippines 40,000Japan (P1,037,000 x 1,000,000/3,500,000)) P296,286 vs. actual P300,000, lower 296,286 P 636,286

4. Income tax still due (P1,037,000 – P636,286)) P 400,714

Alternative Solution of Problem 11-29: If Rosanna Roces opted to use OSD

1. Entertainment fee (P1,700,000/85%) P2,000,000Business income Philippines 500,000 Japan 1,000,000 Total gross income P3,500,000Less: OSD (P3,500,000 x 40%) 1,400,000 Net income before personal exemption P2,100,000Less: Personal exemption - basic P50,000 Additional (P25,000 x 4) 100,000 150,000 Net taxable income P1,950,000

2. Tax on P500,000 P 125,000Tax on excess (P1,450,000 x 32%) 464,000 Income tax due P 589,000

3. Tax creditCreditable withholding tax on fees (P2,000,000 x 15%) P300,000Business income tax paid - Philippines 40,000Japan (P589,000 x 594,000*/2,100,000)) P166,603 vs. actual P300,000, lower 166,603 P 506,603

4. Income tax still due (P589,000 – P506,603) P 82,397

Supporting computation of net taxable income before personal exemptions:

Within Outside Total

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Gross receipts 2,500,000 1,000,000 3,500,000Percent 71% 29% 100%

Allocated OSD x percent 994,000 406,000 1,400,000 Net income before personal exemption 1,506,000 594,000 2,100,000

Problem 11 – 30Mr. Bravo Mrs. Bravo

Gross professional income (P100,000/90%) P111,111Rent income (P300,000/2) 150,000 P150,000Gross compensation income 225,000 300,000 Total P486,111 P450,000Less: Personal exemptions 150,000 50,000 Net taxable income P336,111 P400,000

Tax on P250,000 P 50,000 P 50,000Tax on excess: Mr. Bravo (P86,111 x 30%) 25,833 Mrs. Bravo (P150,000 x 30%) . 45,000 Income tax due P 75,833 P 95,000Withholding tax on compensation ( 25,000) ( 50,000)Withholding tax on professional income (P111,111 – P100,000) ( 11,111) . Income tax still due and payable P 39,722 P 45,000

Note: No OSD is allowed because the taxpayer did not opt to use it in lieu of itemized deduction. (Sec. 34 (L), NIRC)

Alternative Solution of Prob. 11-30: If taxpayers opted to use OSDMr. Bravo Mrs. Bravo

Gross professional income (P100,000/90%) P111,111Rent income (P300,000/2) 150,000 P150,000Total gross income P261,111 P150,000Less: OSD (40%) 104,444 60,000 Net income from business P156,667 P 90,000Add: Gross compensation income 225,000 300,000 Total P381,667 P390,000Less: Personal exemptions 150,000 50,000 Net taxable income P231,667 P340,000

Tax on P140,000/ P250,000 P 22,500 P 50,000Tax on excess: Mr. Bravo (P91,667 x 25%) 22,917 Mrs. Bravo (P90,000 x 30%) . 27,000 Income tax due P 45,417 P 77,000Withholding tax on compensation ( 25,000) ( 50,000)Withholding tax on professional income (P111,111 – P100,000) ( 11,111) . Income tax still due and payable P 9,306 P 27,000

Problem 11 – 311. P290,000

Compensation income P300,000Taxable 13th month pay and bonuses (P40,000 – P30,000) 10,000Net business income (P400,000 – P300,000) 100,000Capital gains – long-term (P60,000 x 50%) 30,000 Total P440,000Less: Personal exemptions (P50,000 + P100,000) 150,000 Net taxable income P290,000

2. (P8,000)Tax on P250,000 P 50,000Tax on excess (P40,000 x 30%) 12,000 Total income tax due P 62,000Less: Income tax paid on: Compensation P 50,000 Quarterly business income 20,000 70,000

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Income tax refund (P 8,000)

Problem 11 – 32

Gross income from business (P1,000,000 – P700,000) P 300,000Operating expenses (P250,000 – P60,000 – P30,000) ( 160,000) Deductible interest expense (P30,000) – (P20,000 x 12/32) ( 22,500)Deductible contribution (P300,000 – P160,000 – P22,500) x 10% ( 11,750)Net business income P 105,750Capital asset transactions: Capital gains – short-term (P300,000 x 100%) P 300,000 Capital losses – long-term (P400,000 x 50%) 200,000 100,000 Lotto winning, USA 300,000 Gambling winnings P 200,000 Gambling losses (excess cannot be deducted from other income)

250,000

Gross compensation income (P180,000 + P20,000) 200,000Taxable 13th month pay (P35,000 – P30,000) 5,000 Net taxable income before exemption P 710,750Less: Personal exemptions (P50,000 + P100,000) 150,000 Net taxable income P 560,750

Tax on P500,000 P 125,000Tax on excess (P60,750 x 32%) 19,440 Total income tax due P 144,440Less: Withholding tax on compensation 20,000 Income tax still due and payable P 124,440

Problem 11 – 331. 13th month pay P25,000

Other benefits: Excess of clothing allowance (P4,500 – P4,000) P 500 Excess of rice subsidy (P1,600 – P1,500) x 12 1,200 1,700 Total (not exceeding P30,000) – nontaxable P26,700 Allowable de minimis: Clothing allowance P4,000 Rice subsidy (P1,500 x 12) 18,000 22,000 Total 13th month pay and other benefits P48,700

2. Basic salary (P25,000 x 12) P300,000Less: Personal exemptions 150,000 Net taxable compensation income P150,000

Tax on P140,000 P22,500Tax on excess (P10,000 x 25%) 2,500 Total income tax due P25,000

Withholding tax from January to November 2009 (P25,000/12) x 11 P22,917

3. Net taxable compensation income P150,000Add: Net business income: Professional fees (P224,000/1.12) P 200,000 Gross income from sales (P5,000,000 – P3,200,000) 1,800,000 Less: Itemized deductions: P2,000,000 Operating expenses, net of interest expense (P900,000 – P50,000) P850,000 Interest expense (P50,000 – (P75,000 x 38%) 21,500 871,500 Net income before contribution P1,128,500 Less: Contribution, actual = P100,000, lower Contribution, limit (P1,128,500 x 10%)= P112,850 100,000 1,028,500Net taxable income P1,178,500

Tax on P500,000 P125,000Tax on excess (P678,500 x 32%) 217,120 Total income tax due P342,120Less: Tax credits: WTW from Jan to Nov., 2009 P22,917 WT on Professional income (P224,000 – P200,000) 24,000 46,917 Income tax still due and payable on December 31, 2009 P295,203

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Problem 11 – 34

Note: OSD is not applicable unless the taxpayer signified in his ITR that he opted to use OSD in lieu of itemized deductions. (Sec. 34 (L), NIRC)

Taxpayer is a resident citizen

a. Normal (tabular) tax:Salaries: Philippines U. S. A. Total Within (P180,000/90%) P200,000 Without ($2,250/90%) x P50 P125,000 P325,000Commissions: Within (P57,000/ 95%) 60,000 Without ($950/ 95%) x P50 50,000 110,000Interest income-without 75,000 75,000 ($1,200/80%) x P50Dividend-without ($1,800/90%) x P50 . 100,000 100,000 Totals P260,000 P350,000 P610,000Less: Personal exemption – basic 50,000 Taxable income P560,000Tax on P500,000Tax on excess (P60,000) x 32% TotalLess: Tax credits: Compensation (P200,000 x 10%) Commission (P60,000 x 5%) Allowable tax credit - foreign*Income tax due and payable, after tax credits

P20,0003,000

40,000

P125,000 19,200 P144,200

63,000 P 81,200

*Allowable tax credit paid outside the Philippines is lower than tax limit or actual tax paid. The tax credit is computed as follows:

Limit (P350,000/P610,000) x P144,200Actual foreign taxes paid: Interest (P75,000 x 20%) Compensation (P125,000 x 10%) Dividend (P100,000 x 10%) Commissions (P50,000 x 5%) Total

Allowable foreign tax credit - lower

P82,738

P15,00012,50010,000

2,500 P40,000

P40,000Note: The actual tax paid outside the Philippines is lower than the computed tax limit; hence, the actual tax paid without is the allowable tax credit.

b. Passive income tax:Interest income within (P50,000/ 80%) x 20%Dividend income within (P9,000/ 90%) x 10%Total passive income tax for the year

P12,500 1,000 P13,500

Note: Philippine Lotto winnings are tax-exempt.

Taxpayer is a nonresident citizena. Normal (tabular) tax:

Salaries - within (P180,000/90%)Commissions- within (P57,000/ 95%)Net incomeLess: Personal exemption - basic Taxable income

P200,000 60,000 P260,000 50,000 P210,000

Tax on P140,000Tax on excess (P70,000) x 25% Total tax dueLess: Withholding taxes within (P20,000 + P3,000)Income tax due and payable

P22,500 17,500 P40,000 23,000 P17,000

b. Passive income tax:Interest income within (P50,000/80%) x 20%Dividend income within (P9,000/90%) x 10%Total passive income tax for the year

P12,500 1,000 P13,500

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Note: Nonresident citizens are taxable only on income derived within the Philippines.

Taxpayer is a resident alien. Solution is the same as nonresident citizen.Taxpayer is a nonresident alien engaged in trade or business in the Philippines.The taxpayer cannot be regarded as doing business in the Philippines because he has no business income in the Philippines.If the taxpayer has stayed more than 180 days in the Philippines, he is regarded as doing business. The computation of his net income tax payable in the Philippines will be the same as in number 2 under the assumption that his country is granting the same privilege of reciprocity to nonresident Filipino doing business in that foreign country. Taxpayer is a nonresident alien not engaged in trade or business in the Philippines.Nonresident aliens are subject to tax of 25% based on their gross income derived within the Philippines. In our illustration, let us assume that the source of income has been deducted with 25% tax on the income given to the taxpayer - that is, the amount shown in the problem is net of 25% final tax. The income tax of Mr. Ramsay Colorado would be:Salaries- within (P180,000/75%) P240,000Commissions- within (P57,000/ 75%) 76,000Interest income within (P50,000/ 75%) 66,667Dividend income within (P9,000/ 75%) 12,000 Gross income within P394,667Multiplied by tax rate 25% Income tax for the taxable year within P 98,667Note: In computing the income tax, a fractional part of a peso less than P0.50 shall be disregarded. If the fractional part is P0.50 or more, its shall be rounded up to P1.00 (R.A. 590).

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Chapt-11 Income Tax - Individuals

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