Individual Income Tax1. Persons subject to the individual income tax For income tax purposes, individual taxpayers are classified into:(a) Citizen(1) Resident citizen is a citizen of the Philippines who has a permanent home or place of aode in the Philippines to which he!she intends to return whenever he!she is asent for usiness or pleasure"(#) Nonresident citizenisacitizenofthePhilippineswhoestalishesthefact ofhis!herphysical presence aroad with the definite intention to reside therein andshall include any Filipino who leaves the country as immi$rant (one wholeaves thePhilippines toresidearoadas animmi$rant for whichaforei$n visa as such has een secured), permanent employee ( one wholeaves the Philippines to reside aroad permanently for re$ularemployment),and contractwor%er(onewholeaves thePhilippinesonaccount of a contract of employment which is renewed from time to timedurin$thetaxaleyearastore&uirephysical presencearoadforana$$re$ate period of one hundred ei$hty (1'() days or more durin$ suchtaxale year)"(b) Alien(1) Resident alienis an individual who is not a citizen of the Philippines utwhoseresidence is within the Philippines"(2) Nonresident alienis an individual who is not a citizen of the Philippinesand whoseresidenceisnot withinthePhilippines") nonresident alienisdeemeden$a$ed in trade or usiness in the Philippines if he!she has stayed in thePhilippinesfor an a$$re$ateperiodof morethan1'( daysdurin$ anycalendar year"2. Income Subject to TaxThe incomes of individuals are $rouped into different cate$ories, to wit:a" Compensationincome,consists of income arisin$fromemployer*employeerelationship such as salaries, wa$es, emoluments and honoraria, commissions,taxaleonuses andfrin$eenefits, taxaleallowances (suchas transportation,representation, entertainment, and the li%e), non*monetary compensation, director+sfees and the li%e, taxale pensions and retirement pay, amounts drawn as salaries ypartners of a partnership and other incomes of a similar nature unless specificallyexempted y the Tax ,ode" " Business income and income from profession, consists of usiness and!or tradeincome, fees fromthe exercise of profession, $ains fromsale or exchan$e of assets,commissions, rental income, and other incomes not covered y compensation income" c" Passive income and other sources of income,consist of interest from forei$nandPhilippinecurrencyan%deposits (includin$yields andother monetaryenefits fromdeposit sustitutes andtrust fundandsimilar arran$ements),royalties, prizes and other winnin$s, and dividends" The other sources of incomeinclude capital $ains fromsales of shares of stoc%, sales of real property,informer+s rewards, etc". !etermination o" Taxable Incomea. Citizen(1) Resident citizen * on incomes derived from sources within andwithout the Philippines, as follows: (a) -n compensation income * on modified $ross incomeasis i"e", $ross compensation income less deductionsand!or personal and additional exemptions.() -n income from profession, usiness and!or trade * onnet incomeasisi"e", $rossincomefromprofession,usiness and!or trade less the itemized deductions oroptional standard deduction e&uivalent to /(0of$ross sales or $ross receipts and personal exemption,and if applicale, additional exemption allowance!s. (c) -n Passive income 1 on the $ross amount thereof(#) Nonresident citizen * taxed similarly as a resident citizen on incomes from sources within the Philippines"b. Alien(1) Resident alien* taxed similarly as a resident citizen onincomes received from sources within the Philippines" (#) Nonresident alien: engaged in trade or business in the Philippines * taxedsimilarly as a resident citizen on incomes from sourceswithin the Philippines" not engaged in trade or business in the Philippines*taxedon$ross incomefromall sourceswithinthePhilippines" employed by regional or area headquarters andregional operating headquarters of multinationalcorporations, offshore banking units, or servicecontractorsorsubcontractorsengagedinpetroleumoperations in the Philippines * taxed on $ross incomederived from such employment"#. $xclusions "rom %ross IncomeThe followin$ are not included in the computation of the $ross income oftaxpayers:a" Proceeds of lifeinsurancepolicies ut not theinterest paidtotheheirs oreneficiaries. " )mount received y the insured as return of premium. c" 2alue of property ac&uired y $ratuitous transfer ut not the income from suchproperty. d" ,ompensation for in3uries or sic%ness includin$ dama$es received. e" Income exempt under treaty. f" 4etirement enefits, pensions, $ratuities, etc" under certain conditions. $" Incomederivedyforei$n$overnments,financin$institutionsowned, controlled or en3oyin$ financin$ from forei$n $overnments, and international orre$ional financin$institutionsestalishedyforei$n$overnments, fromtheirinvestments in loans, stoc%s, onds or other domestic securities or from intereston their deposits in an%s in the Philippines.h" Incomederivedfromanypulicutilityorfromtheexerciseofanyessential$overnment function accruin$ to the Philippine $overnment or to any politicalsudivision. i" Prizes and awards made primarily in reco$nition of reli$ious, charitale,scientific, educational, artistic, literary, or civicachievement ut onlyif therecipient wasselectedwithout anyactiononhispart toenter thecontest orproceedin$, and is not re&uired to render sustantial future services as acondition to receivin$ the prize or award" 3" Prizes and awards $ranted to athletes in local and international sportscompetitions and tournaments held in the Philippines or aroad and sanctionedy their respective national sports associations"%" 15th month pay mandated y 4epulic )ct 6o" 77'7 and Presidential 8ecree 6o"'91, as amended and other enefits not covered y P8 '91 and enefits such asproductivity incentives and ,hristmas onus which should not exceed P'#,((("((l" :;I;, ;;;, > > 6 > 6 > 6 * 6Income5"Passive Incomea"4oyalties > > > 6 > 6 > 6 > 6"Prizes and othertaxale > > > 6 > 6 > 6 > 6?innin$sc"Interest income from > > > 6 > 6 > 6 > 6Philippine currency an%deposits and yield or anyother monetary enefitfrom deposit sustitutesand from trust funds andsimilar arran$ementsd"Interest income from > > > 6 > 6 > 6 > 6lon$*term depositinstruments pre*terminated efore thefifth (9th) yeare"Interest income from > > 6 6 > 6 6 6 6 6forei$n currency an%8epositsf" ,ash and!or property > > > 6 > 6 > 6 > 68ividends/" -ther ;ources of Income > > > 6 > 6 > 6 > 6@e$end: >* yes !6* 6o1. !eductions "rom %ross Incomea" ,itizen(1) 4esident ,itizeni" ,ompensation Income-nly premium payments on health and!or hospitalizationare deductile from $ross compensation incomeii" =usiness and!or Professional IncomeThe followin$ payments incurred in connection with thetaxpayer+s profession, trade or usiness are deductile from $rossincome: -rdinary and necessary trade, usiness or professionalexpenses paid or incurred durin$ the taxale year(such as salaries, wa$es, $rossed*up monetary value offrin$eenefits $rantedtoemployees, travel, rental,entertainment, amusement and recreation)" InterestInterest paidor incurredwithinthetaxaleyear onindetedness in connection with the taxpayer+sprofession, tradeorusinesswhichshallereducedy 550 of the $rossed*up value of the interest incomesu3ected to final tax" TaxesTaxes paid or incurred within the taxale year inconnectionwiththe taxpayer+s profession, trade orusiness except the income taximposedunder the,ode, forei$n income tax paid y a taxpayer who didnot si$nify in his!her return his!her desire to have anyrefundorcredit, estateanddonor+staxes, andtaxesassesseda$ainst local enefits of a%indtendin$toincrease the value of the property assessed" @osses@osses actuallysustainedythetaxpayer inconnection with the taxpayer+s trade,profession, or usiness which are char$ed offwithinthetaxaleyearandnot compensatedfor y insurance or other forms of indemnity @osses from sale or exchan$es of capital assetsare deductileonly to the extentof the$ainsfrom such sales or exchan$es" @osses from wash sales of stoc% or securitiesare allowed when the claim is made y a dealerinstoc%or securities, andwithrespect toatransaction made in the ordinary course ofusiness of such dealer under certainconditions" @osses from wa$erin$ transactions aredeductile to the extent of the $ains from suchtransactions 6et -peratin$ @oss ,arry*over The amount of net operatin$ loss sustained yan individual taxpayer en$a$ed in usiness orpractice ofprofession whodoesnoten3oyanincome tax exemption under the Tax ,ode orspecial laws at the time such loss was incurredisallowedtoecarriedover asadeductionfrom $ross income for three consecutivetaxaleyearsimmediatelyfollowin$theyearof the loss" In the case of usinesses or enterprisesen$a$edinminin$operations other thanoiland $as wells which are not en3oyin$ theenefit of incentives $rantedunder A-6o"##7, as amended, the net operatin$ lossincurred in the first ten (1() years of theoperation of their usiness may e carried overas deduction from taxale income for five (9)years immediatelyfollowin$theyear of theloss" =ad 8ets =ad dets actually ascertained to e worthlessand char$ed off durin$ the taxale year" =ad dets arisin$ from loss on securities heldascapital assetswhichareascertainedtoeworthlessandchar$edoffwithinthetaxaleyear y a taxpayer, except domestic an%s ortrust companiesthesustantialpartofwhoseusiness is the receipt of deposits" 8epreciation )reasonale allowance for the exhaustion,wear and tear (includin$ reasonale allowancefor osolescence) of property used in trade orusiness computed usin$ the strai$ht*linemethod, declinin$*alancemethodorsum*of*the*years*di$it method" )nallowance for depreciation of propertiesdirectly related to production of petroleuminitiallyplacedinservice ina taxale yearusin$ the strai$ht*line or declinin$*alancemethodof depreciation, at theoptionof thetaxpayer" The useful life of properties used inor related to the production of petroleum shalle ten (1() years or such shorter life as may epermittedythe,ommissioner,andfive(9)years for those properties not used directly inthe production of petroleum" )n allowance for depreciation in respect of allproperties used in minin$ operations whichshall e computed at the normal rate ofdepreciationif the expectedlife is ten(1()years or less, or depreciated over any numerof years etween five (9) years and theexpected life if the latter is more than ten (1()years, and the depreciation thereon allowed asdeduction from taxale income" 8epletion of -il and :as ?ells and