Chapter 11 (Income Tax of Individuals)

Key Answer - Taxation

PAGE 69INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

Chapter 11: Income Tax of Individuals

CHAPTER 11

INCOME TAX OF INDIVIDUALS

Problem 11 1 TRUE OR FALSE1. 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. True

5. True

6. True

7. True

8. True

9. True

10. True

11. 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 income

5. 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-exempt

11. True

12. True

Problem 11 3Problem 11 4Problem 11 5

1. D1. D1. Not in the choices. P25,000 per child (R.A. 9504)

2. D2. B2. Not in the choices. P50,000 basic (R.A. 9504)

3. A3. C3. B

4. A4. A4. C

5. A5. B5. B

6. B6. D5. B

7. D7. B6. A, B & C

8. C8. B7. D

9. C9. B8. D

10. B10. A9. D

10. C

Problem 11 6 AIncome from the Philippines (P10,000 x 12)P120,000

Less: Personal exemption single 50,000

Income subject to tax in the PhilippinesP 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 C

Gross compensation income Philippines (P250,000 x 12)P3,000,000

Multiplied by special income tax rate 15%

Income tax payableP 450,000

Problem 11 8A

Basic personal exemption of couple:

HusbandP50,000

Wife 50,000

Additional exemptions:

4 qualified dependent children (P25,000 x 4) 100,000

Maximum amount of personal exemptionP200,000

Problem 11 9COnly P50,000 basic personal exemption because the taxpayers category is single.

Problem 11 10BBasic personal exemption Married P50,000

Additional exemption 25,000

Total personal exemptionsP75,000

Problem 11 11CBasic personal exemptionP50,000

Additional exemption (a & b only) (P25,000 x 2) 50,000

Total personal and additional exemptionsP100,000

Problem 11 12A

Basic personal exemption married P 50,000

Nonresident 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 13A

P200 per month. For the month of December only.

Problem 11 14D

No special deduction is allowed. The family income exceeding P250,000 is not allowed for a special deduction for health insurance.

Problem 11 15D

Zero. Maria has no income.

Problem 11 16A

No net tax payable at the end of the taxable year because the senior citizens income does not exceed P60,000 during the year. The tax withheld from interest income is final tax.

Problem 11 17Subject to

1.Not in the choices = P790,000 & P160,000Tabular taxFinal tax

Compensation incomeP240,000

Business 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 exemptionP840,000

Less: Basic personal exemption single ( 50,000)

Net income to ITR tabular taxP790,000

Interest income within P100,000

Dividend income within 60,000

Income subject to final taxP160,000

2.A


Business income:

Professional income 300,000


Less: Basic personal exemption single 50,000





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 OSD

Subject to

1.ATabular taxFinal tax


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 incomeP600,000

Less: OSD (P600,000 x 40%) ( 240,000)

Net business income P360,000


Less: Basic personal exemption single ( 50,000)





2.Not in the choices = P370,000 & P160,000


Business income:

Professional income, net of OSD (P300,000 x 60%) 180,000


Less: Basic personal exemption 50,000





Problem 11 18D

Husband Wife

Net taxable incomeP140,000P250,000

Income tax P 22,500P 50,000

Less: Withholding tax 20,000 45,000

Net tax payableP 2,500P 5,000

Problem 11 19D

Compensation as researcher P 600,000

Less: Personal exemption married 50,000

Net taxable compensation incomeP 550,000

Tax on P500,000 P125,000

Tax on excess (P50,000 x 32%) 16,000

Total income tax from compensationP141,000

Dividend income tax (P120,000 x 10%)12,000

Interest income tax (P500,000 x 7.5%) 37,500

Total income tax dueP190,500

Problem 11 20D

Capital gains tax on shares of stock (P80,000 x 5%)P 4,000

Capital gains tax on sale of land (P2,000,000 x 6%) 120,000

Total capital gains tax paidP124,000

Problem 11 21B1.B

Final tax on copyright royalty (P11,250/90%) x 10%P 1,250

Final tax on mineral claim royalty (P12,000/80%) x 20%3,000

Final tax on share from trading partnership as dividend (P270,000/90%) x 10% 30,000

Total final taxP34,250

2. Not in the choices

None. All reported earnings are subject to final tax.

Problem 11 22B

Percent of service100%

Add: Output VAT 12%

Total 112%

Less: Withholding tax 20%

Percent of net proceeds 92%

Net proceedsP 92,000

Divided by percent of net proceeds 92%

Service feeP100,000

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

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

Problem 11 23

1. A

Salaries of assistants

Traveling expenses

Light and water, Office

Stationeries and supplies

Office rent

Total expenses before contribution

Add: Contribution subject to limit (P500,000 P176,850) x 10%

Total allowable deductionsP 96,000

11,000

7,890

1,960

60,000

P176,850

32,315

P209,165

2. C

Professional fees

Less: Allowable deductions

Net income from business

Add: Income from compensation:

Allowance as director of Corporation A

Commissions

Net income before personal and additional exemptionsP25,000

5,000P500,000

209,165

P290,835

30,000

P320,835

3. DNet income before personal and additional exemptions

Less: Personal and additional exemptions:

Basic widower

Additional exemptions (P25,000 x 3 qualified children)

Net taxable incomeP 50,000

75,000P320,835

125,000

P195,835

Tax on P140,000

Tax on excess (P55,835) x 30%

Income tax dueP 22,500

13,959P 36,459

Problem 11 24

1. 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 income

Income before contribution

Less: Contributions:

Deductible in full

With limit

Actual, P50,000

Limit, P268,000 x 10% = P26,800

Allowed

Net income before personal exemptions

Less: Personal exemptions (P50,000 +p100,000)


26,800P375,000

325,000

P 50,000

150,000

70,000

P270,000

2,000

P268,000

46,800

P221,200

150,000

P 71,200

2. P140,000

Corrected net taxable income

Less: Reported net income subject to tax

Unreported taxable incomeP 71,200

24,200

P 47,000

Problem 11 25

1. Itemized deduction

Compensation income

Gross income from business

Less: Itemized deduction

Total income before personal exemptions

Less: Personal exemptions

Basic personal exemptions

Additional exemptions (P25,000 x 4)

Taxable incomeP 400,000

150,000

P 50,000

100,000

P 20,000

250,000

P270,000

150,000

P120,000

Computation of income tax:

Tax on P70,000


Income tax before withholding tax

Less: Withholding tax

Income tax due and payableP 8,500

10,000P 18,500 1,000

P 17,500

2. Optional standard deduction

Compensation income

Gross income from business

Less: Optional standard deduction (40%)Total income before personal exemptions

Less: Personal exemptions

Basic personal exemptions

Additional exemptions (P8,000 x 4)

Taxable incomeP 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 P70,000

Tax on excess (P40,000 x 20%)Income tax before withholding tax

Less: Withholding Tax

Income tax due and payableP 8,500

8,000

P 16,500

1,000

P 15,500

Problem 11 26

2010 net income from business

Capital 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, 2010P 40,000

15,000

(10,000)

P45,000

35,000

P 50,000

75,000

P 600,000

10,000

P 610,000

125,000P 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 27

1.Compensation income (P240,000 + P30,000)P270,000

Less: Personal exemption (P50,000 + P25,000) 75,000

Net taxable compensationP195,000

Business incomeP100,000

Less: Business expenses 120,000

Net loss from business(P20,000) 0 -

Net taxable incomeP195,000

2.Tax on P140,000P22,500

Tax on excess (P55,000 x 25%) 13,750

Income tax dueP36,250

Less: Tax credit 30,000

Income tax still due and payableP 6,250

Problem 11 28

1.Salary (P30,000 x 12)P360,000

Add: Taxable 13th month pay (P35,000 P30,000) 5,000

Total P365,000

Less: SSS contributionP3,000

Medicare/Philhealth contribution 2,000 5,000

Taxable compensation income before personal exemptionP360,000

Less: Personal exemption 50,000

Net taxable compensation incomeP310,000

Estimated income tax due:

Tax on P250,000P50,000

Tax on excess (P60,000 x 30%) 18,000

Total income tax due per yearP68,000

Divided by number of months in a year 12

Monthly withholding taxP 5,667

2. Quarterly business income tax

Business income per quarter

Less: Business expense per quarter

Net income per quarter

Tax on P70,000

Tax on excess (P10,000 x 20%)

Quarterly business income tax first quarter to third quarterP200,000

120,000

P 80,000

P 8,500

2,000

P 10,500

Problem 11 29

1.Entertainment fee (P1,700,000/85%)P2,000,000

Business income

Philippines500,000

Japan1,000,000

Net income before personal exemptionP3,500,000

Less: Personal exemption - basicP50,000

Additional (P25,000 x 4) 100,000 150,000

Net taxable incomeP3,350,000

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 P500,000P 125,000

Tax on excess (P2,850,000 x 32%) 912,000

Income tax dueP1,037,000

3.Tax credit

Creditable withholding tax on fees

(P2,000,000 x 15%)P300,000

Business income tax paid - Philippines40,000

Japan (P1,037,000 x 1,000,000/3,500,000))

P296,286 vs. actual P300,000, lower 296,286P 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%)P2,000,000

Business income

Philippines500,000

Japan 1,000,000

Total gross incomeP3,500,000

Less: OSD (P3,500,000 x 40%) 1,400,000

Net income before personal exemptionP2,100,000

Less: Personal exemption - basicP50,000

Additional (P25,000 x 4) 100,000 150,000


2.Tax on P500,000P 125,000

Tax on excess (P1,450,000 x 32%) 464,000

Income tax dueP 589,000

3.Tax credit

Creditable withholding tax on fees

(P2,000,000 x 15%)P300,000

Business income tax paid - Philippines40,000

Japan (P589,000 x 594,000*/2,100,000))

P166,603 vs. actual P300,000, lower 166,603P 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

Gross receipts2,500,0001,000,0003,500,000

Percent71%29%100%

Allocated OSD x percent 994,000 406,000 1,400,000

Net income before personal exemption1,506,000594,0002,100,000

Problem 11 30

Mr. BravoMrs. Bravo

Gross professional income (P100,000/90%)P111,111

Rent income (P300,000/2) 150,000P150,000

Gross compensation income 225,000 300,000

Total P486,111P450,000

Less: Personal exemptions 150,000 50,000


Tax on P250,000P 50,000P 50,000

Tax on excess:

Mr. Bravo (P86,111 x 30%)25,833

Mrs. Bravo (P150,000 x 30%) . 45,000

Income tax due P 75,833P 95,000

Withholding tax on compensation( 25,000)( 50,000)

Withholding tax on professional income (P111,111 P100,000)( 11,111) .

Income tax still due and payableP 39,722P 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 OSD

Mr. BravoMrs. Bravo

Gross professional income (P100,000/90%)P111,111

Rent income (P300,000/2) 150,000P150,000

Total gross incomeP261,111P150,000

Less: OSD (40%) 104,444 60,000

Net income from businessP156,667P 90,000

Add: Gross compensation income 225,000 300,000

Total P381,667P390,000

Less: Personal exemptions 150,000 50,000


Tax on P140,000/ P250,000P 22,500P 50,000

Tax on excess:

Mr. Bravo (P91,667 x 25%)22,917

Mrs. Bravo (P90,000 x 30%) . 27,000

Income tax due P 45,417P 77,000

Withholding tax on compensation( 25,000)( 50,000)

Withholding tax on professional income (P111,111 P100,000)( 11,111) .

Income tax still due and payableP 9,306P 27,000

Problem 11 31

1. P290,000


Taxable 13th month pay and bonuses (P40,000 P30,000)10,000

Net business income (P400,000 P300,000)100,000

Capital gains long-term (P60,000 x 50%) 30,000

Total P440,000

Less: Personal exemptions (P50,000 + P100,000) 150,000

Net taxable incomeP290,000

2. (P8,000)Tax on P250,000P 50,000

Tax on excess (P40,000 x 30%) 12,000

Total income tax dueP 62,000

Less: Income tax paid on:

CompensationP 50,000

Quarterly business income 20,000 70,000

Income tax refund(P 8,000)

Problem 11 32

Gross income from business (P1,000,000 P700,000)P 300,000

Operating 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 incomeP 105,750

Capital asset transactions:

Capital gains short-term (P300,000 x 100%)P 300,000

Capital losses long-term (P400,000 x 50%) 200,000100,000

Lotto winning, USA300,000

Gambling winningsP 200,000

Gambling losses (excess cannot be deducted from other income) 250,000

Gross compensation income (P180,000 + P20,000)200,000

Taxable 13th month pay (P35,000 P30,000) 5,000

Net taxable income before exemptionP 710,750

Less: Personal exemptions (P50,000 + P100,000) 150,000


Tax on P500,000P 125,000

Tax on excess (P60,750 x 32%) 19,440

Total income tax dueP 144,440

Less: Withholding tax on compensation 20,000

Income tax still due and payableP 124,440

Problem 11 33

1.13th 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 allowanceP4,000

Rice subsidy (P1,500 x 12)18,000 22,000

Total 13th month pay and other benefitsP48,700

2.Basic salary (P25,000 x 12)P300,000

Less: Personal exemptions 150,000

Net taxable compensation incomeP150,000

Tax on P140,000P22,500

Tax on excess (P10,000 x 25%) 2,500


Withholding tax from January to November 2009

(P25,000/12) x 11P22,917

3.Net taxable compensation incomeP150,000

Add: 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 contributionP1,128,500

Less: Contribution, actual = P100,000, lower

Contribution, limit (P1,128,500 x 10%)= P112,850 100,0001,028,500


Tax on P500,000P125,000

Tax on excess (P678,500 x 32%) 217,120


Less: Tax credits:

WTW from Jan to Nov., 2009P22,917

WT on Professional income (P224,000 P200,000) 24,000 46,917

Income tax still due and payable on December 31, 2009P295,203

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

P125,000P325,000

Commissions:

Within (P57,000/ 95%) 60,000

Without ($950/ 95%) x P5050,000110,000

Interest income-without75,00075,000

($1,200/80%) x P50

Dividend-without ($1,800/90%) x P50 . 100,000 100,000

Totals P260,000P350,000P610,000

Less: Personal exemption basic 50,000

Taxable incomeP560,000

Tax on P500,000


Total

Less: Tax credits:

Compensation (P200,000 x 10%)

Commission (P60,000 x 5%)

Allowable tax credit - foreign*

Income tax due and payable, after tax creditsP20,000

3,000

40,000P125,000

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 P144,200

Actual 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 - lowerP82,738P15,000

12,500

10,000

2,500

P40,000

P40,000

Note: 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 citizen

a. Normal (tabular) tax:

Salaries - within (P180,000/90%)

Commissions- within (P57,000/ 95%)

Net income

Less: Personal exemption - basic

Taxable income

P200,000

60,000

P260,000

50,000

P210,000

Tax on P140,000


Total tax due

Less: 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

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%)

P240,000

Commissions- within (P57,000/ 75%)76,000

Interest income within (P50,000/ 75%)66,667

Dividend income within (P9,000/ 75%) 12,000

Gross income withinP394,667

Multiplied by tax rate 25%

Income tax for the taxable year withinP 98,667

Note: 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).

Documents

Chapter 11 (Income Tax of Individuals)