#PHTax | How to compute your income tax?




Calculate the tax you pay yourself.

Here's how to compute income tax.


What are the things you need to deduct from your gross income? What are the tax exemptions?

PERSONAL EXEMPTIONS

For purposes of determining the income tax payable by the taxpayer, there shall be allowed basic personal exemption amounting to P50,000 for each individual taxpayer. There is also an additional exemption of P25,000 for each dependent child not exceeding 4 which shall be claimed only one of the spouses in the case of married individuals. The husband shall be the proper claimant of the additional exemption for qualified dependent children. However, the wife shall claim full additional exemption for children if the husband is unemployed, non-resident citizen deriving income from foreign sources, and the husband explicitly waves his right to claim the exemptions of children in favor of his wife. An individual qualifies as a dependent only if the child is legitimate, illegitimate or legally adopted, he must not be more than 21 years old during the taxable year unless he is incapable of self-support because of mental or physical defect, he must not be married and gainfully employed, he must be living with the taxpayer, and the taxpayer must provide over 50% of the dependent's support.

'DE MINIMIS' BENEFITS

These are exempt from the fringe benefits tax. The following are considered as 'de minimis' benefits not subject to income tax as well as withholding tax on compensation income of both managerial, supervisory and rank-and-file employees:


  • Monetized unused vacation leave credits of private employees not exceeding 10 days during the year;
  • Monetized value of vacation and sick leave credits paid to government officials and employees;
  • Medical cash allowance to dependents of employees not exceeding P750 per employee per semester or P125 per month;
  • Rice subsidy of P1,500 or 1 sack of 50-kg rice per month amounting to not more than P1,500;
  • Uniforms and clothing allowance not exceeding P5,000 per annum;
  • Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10,000 per annum;
  • Laundry allowance not exceeding P300 per month;
  • Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees;
  • Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum;
  • Daily meal allowance for overtime work and night.graveyard shift not exceeding 25% of the basic minimum wage.

If the employer pays more than the ceiling, the excess shall be taxable to the employee receiving the benefits only if such excess is beyond P30,000.

13TH MONTH PAY AND OTHER BENEFITS

Thirteenth month pay equivalent to the mandatory 1 month basic salary of officials and employees of the government received after the 12th month pay and other benefits such as Christmas bonus, productivity incentive bonus, loyalty award, gifts in cash or in kind received by officials and employees of both government and private employees are exempt from income tax, provided that the total amount shall not exceed P30,000. The excess is considered taxable.

FRINGE BENEFITS

These are the goods and services or other benefits furnished or granted by an employer in cash or in kind, in addition to basic salaries to an individual employee. The fringe benefits tax shall not apply to rank and file employees. The fringe benefits received by this class of employees shall form part of their compensation income.

A final withholding tax at the rate of 32% is imposed on the grossed-up monetary value of the fringe benefit. The grossed-up monetary value of the fringe benefit shall be determined by dividing the monetary value of fringe benefit by 68%.

If the employer lends money to his employee free of interest or at a rate lower than 12%, such interest forgone by the employer or the difference of the interest assumed by the employee and the rate of 12% shall be treated as taxable fringe benefit.

A nonresident alien not engaged in trade or business in the Philippines who receives a fringe benefit is subject to fringe benefit tax at a rate of 25%. The tax base shall be grossed-up monetary value which is computed by dividing the monetary value of the benefit by 75%.

HEALTH/HOSPITALIZATION INSURANCE

An individual taxpayer is allowed to deduct from his gross income or gross compensation income the premium payments on health and hospitalization insurance not exceeding P2,400 per family or P200 a month paid during the taxable year by the taxpayer for himself including his family. To be deductible, the family should have a gross income not more than P250,000 for the taxable year and in case of married taxpayer, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction.

SSS/GSIS/PHILHEALTH/PAG-IBIG

Benefits received from or enjoyed under Social Security System (SSS), Government Service Insurance System (GSIS), PhilHealth and Pag-IBIG shall be exempt from tax.

LIFE INSURANCE PROCEEDS

Proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured are excluded from gross income. However, if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. It should be pointed out that when the insured outlives the policy, the proceeds from life insurance less than total amount of premiums paid should be included in the gross income.

GIFTS, BEQUESTS AND DEVISES

The value of the property acquired b gift, bequest, devise or descent shall be excluded from gross income.

COMPENSATION FOR PERSONAL INJURIES OR SICKNESS

Amounts received through accident or health insurance or under the Workmen's Compensation Act, as compensation for personal injuries or sickness plus the amounts of any damages received, whether by suit or agreement on account of such injuries or sickness are excluded from the gross income. But the recovery of lost income is taxable because it is a compensation for loss of profits or income.

RETIREMENT BENEFITS

Retirement benefits shall be excluded from gross income if there is a reasonable private benefit plan maintained by the employer and approved by the Bureau of Internal Revenue; the retiring official or employee has been in the service of the same employer for at least 10 years; and the retiring official or employee must not be less than 50 years of age at the time of his retirement.

SEPARATION PAY

Amounts received be reason of involuntary separation due to  death, sickness, or other physical disability or for any cause beyond the control of the official or employee are exempt from income tax.

PRIZES AND AWARDS

Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement are excluded from gross income only if the recipient was selected without any action on his part to enter the contest or proceeding and he is not required to render substantial future services as a condition to receiving the prize or award.

MINIMUM WAGE

Holiday pay, overtime pay, night shift differential pay and hazard pay received by a minimum wage earner  shall likewise be covered by the exemption.

EXPENSES

To be deductible, it must be ordinary and necessary, directly attributable to the development, management, operation and conduct of the trade, business or exercise of a profession, and supported by sufficient evidence.

INTEREST

To be deductible, there must be an indebtedness which must be connected with the taxpayer's trade, business or profession, the payment arrangement must not be between related taxpayers, and it must have been stipulated in writing. The taxpayer's allowable deduction from interest expense shall be reduced by 33% of the interest income which has been subjected to final tax.

LOSSES

To be deductible, it must be actually sustained during the year, not compensated by insurance or other forms of indemnity, incurred in trade, profession or business, must arise from fire, storms, shipwreck, or other casualty losses, or from robbery, theft or embezzlement, not claimed as a deduction for estate tax purposes in the estate tax return, and filed within 45 days after the occurrence of such event.

CHARITABLE AND OTHER CONTRIBUTIONS

To be deductible, it must be actually paid within the taxable year and the net income of the institution must not inure to the benefit of any private individual or stockholder.

What are capital assets?

The term 'capital assets' is defined as a property held by the taxpayer but does not include stock in trade or other property included in the inventory if on hand at the close of the taxable year, property primarily for sale to customers in the ordinary course of trade or business, personal property used in trade or business and subject to depreciation and real property used in trade or business.

CAPITAL GAINS OR LOSSES

To recognize capital gain or loss, it is necessary to have a sale or exchange of a capital asset.

To be classified as a long-term capital gain or loss, the asset must be held for more than 12 months.

Capital losses are deductible only from  the capital gain. If an individual sustains in any taxable year a net capital loss, the taxpayer can carry-over the loss in the succeeding year. The capital loss should not exceed the net income for the year in which the loss was sustained and the carry-over of the net capital loss is good only for 1 year.

If the asset was held for more than 12 moths, 50% of the gain or loss shall be recognized. If it is a short-term capital gain or loss, 100% shall be recognized.

An individual taxpayer may elect either itemized deductions or optional standard deduction (OSD) in computing the net taxable income.

OPTIONAL STANDARD DEDUCTION

An individual taxpayer may elect a standard deduction in an amount not exceeding 40% of his gross sales or receipts. The taxpayer must signify his intention to elected OSD. Such election in the return shall be irrevocable for the taxable year to which the return was made.

Which is better?

To minimize tax payment, use itemized deductions or OSD whichever is higher. The higher your deductible, the lower your net taxable income which means to say you will pay lower income tax.

FILING OF INCOME TAX RETURN AND PAYMENT OF TAX

An individual shall not required to file income tax return if his gross income does not exceed his total personal exemptions, except  resident citizens and any alien individual engaged in business or practice of profession within the Philippines regardless of the amount of gross income. When the sole income has been subjected to final withholding tax or it purely compensation, the individual shall not be required to file income tax return. An individual who is exempt from income tax is also not required to file.

It shall be paid not later than 60 days from the close of each of the first 3 quarters of the taxable year, whether calendar or fiscal year.

The income tax returns shall be filed in duplicate.

The return of any individual receiving purely compensation income or self-employment income shall be filed on or before April 15 of each year covering income for the preceding year.

The amount of estimated income shall be paid in 4 installments. The first installment shall be paid at the time of declaration and the second and third shall be paid on or before August 15 and November 15 of the current year, respectively. The fourth installment shall be paid on or before April 15 of the following calendar year when the final adjusted income tax return is due to be filed.

PENALTIES AND INTEREST

In addition to the tax required to be paid, a 25% penalty in case of failure to file the return and pay the tax on time with the proper person shall be imposed. In case of willful neglect to file the return on time and false or fraudulent return in willfully filed, a 50% penalty shall be imposed.

When is a return filed false or fraudulent?

When there is  a substantial under-declaration (more than 30%) of taxable assets, receipts or income and substantial overstatement of deductions more than 30%.

To avoid surcharge, interest and higher tax, pay it on time and be honest.

REFUND OF TAX

Where tax has been paid by the taxpayer, the remedy available to him is to claim refund if the tax was erroneously collected or illegally collected.

The taxpayer must file a written claim for refund with the Commissioner of Internal Revenue within 2 years after final payment of the tax or penalty. Within 30 days from receipt of the decision and within 2 years from the date of final payment, if adverse to the taxpayer, he can file an appeal to the Court of Tax Appeals. Within the said 2-year period and within 15 days from receipt of the decision of the Court of Tax Appeals, he can file an appeal with the Supreme Court.

Should you have any questions, leave your e-mail address, comments and questions on the comments section below.


Author: Paul Michael Camania Jaramillo

Student| Youth Advocate | Leader | Environmental Advocate | Writer | Blogger | RH Advocate

I am neither especially clever nor especially gifted. I am only very, very curious. — Albert Einstein
I write about darkness because I want to show the light — Jose Rizal


Paul is an Accountancy graduate from the Northwestern University. He works for VoicePoints. He was the former College Editors Guild of the Philippines-Ilocos Chairperson. He likes discussing tax issues. He was one of the finalists of the PWC Cup (Taxation and Payroll Accounting)

He has been involved in different advocacy and defending human rights. As a blogger, writer, netizen and an advocate, he has found focus & interest on sexuality & reproductive health, deaf rights & legal access and youth development, leadership, environment advocacy, issues in the nation and in the world, religion, culture and human rights At the age of 14, he has fully embraced the call of leadership.

He was a Lussoc National High School 'The Sring' and 'Ang Batis' news editor. A radical visionary leader, he has led organizations of the Supreme Student Government, Science Club, Youth for Environment in Schools Organization, Interact Club, Math Club, Philippine National Red Cross and other organizations in their institution. He was also awarded as a distinguished student leader as a former officer of the Supreme Student Government and received President Gloria Macapagal Arroyo Campus Journalism Award. He attended two National Leadership Training for the Student Government Officers, Rotary Youth Leadership Awards, Youth for Environment Summer Camp, Science Leaders Congress and Schools Press Conference. Joined and won in the several contests from their school to the national level.

He is an organist and an officer of the Church of Christ (Iglesia Ni Cristo).


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