Individual Taxation, Exemptionand ComputationMapua Institute of Technology – MakatiSS12MEMBERS:Santayana, Rochelle S. Pineda, GioChan, Jillian S. Paet, GabrielKhortalab, Payman Shin, PaulFuentes, Niel Dalisay, CristlePetterson, Ronneil Follosco, Earl JohnCanete, BeccaNicolas, Joey Bryan
A basic understanding of the method used to calculate the taxliability is a necessity in the study of federalincome taxation. The basic tax formula for individuals is as follows:Gross Income− Deductions for Adjusted Gross Income= Adjusted Gross Income− Greater of Itemized Deductions or Standard Deduction− Personal Exemptions= Taxable Income× Tax Rate= Taxable Liability− Tax Credits and Prepayments= Net Tax Due or Refund
Components of the Tax FormulaGross IncomeGross income includes all items of income from whatever source unless speciﬁcallyexcluded. Examples of gross income include compensation for services, interest, rents,royalties, dividends, and annuities. An individual’s income from business is included ingross income after deducting the cost of goods sold.Deductions for Adjusted Gross IncomeTo arrive at adjusted gross income, all deductions specically allowed by law aresubtracted from gross income. Some of the items allowed as deductions for adjustedgross income include:(1) trade or business expenses, such as advertising, depreciation, and utilities,(2) (2) moving expenses,(3) (3) reimbursed employee expenses, such as travel, transportation, andentertainment expenses, and (4) losses from the sale or exchange of property.Adjusted Gross IncomeIn the tax formula there are deductions for adjusted gross income and then deductionsfrom adjusted gross income. It is important to take these deductions in the propercategories. Adjusted gross income is an important subtotal because certain otheritems are based on the amount of adjusted gross income.
Itemizing v. Standard DeductionItemized deductions allowed as a deduction include: medical expenses, state and localincome taxes, property taxes, mortgage interest, charitable contributions, personal casualtylosses, and miscellaneous employee expenses.The standard deduction is a ﬁxed amount based on the ﬁ ling status of the taxpayer and isadjusted annually for inﬂation. Taxpayers subtract the larger of their itemized deductions orthe standard deduction. For 2011, the standarddeduction amounts are $11,600 for married taxpayers ﬁ ling jointly and surviving spouses,$5,800 for single taxpayers, $8,500 for heads of households, and $5,800 for marriedtaxpayers ﬁ ling separately.Personal ExemptionsIndividual taxpayers can reduce their income tax liability by properly claiming exemptions forthemselves, theirspouses, and their dependents. For 2011, taxpayers are allowed a $3,700 deduction for eachpersonal exemption.Tax RatesTax liability is either derived from the appropriate column of the Tax Tables or is computedfrom the appropriateline in the Tax Rate Schedules. The tax rate schedules include six tax brackets in 2011—10,15, 25, 28, 33, and 35percent.
Tax Credits and PrepaymentsTax credits are applied against the income tax. The principalcredits include the earned income credit, childtax credit, credit for the elderly, general business credit,dependent care credit, and foreign income tax credit. The taxliability is further reduced by the amounts withheld on incomeand by any estimated tax payments made during theyear.Net Tax Due or RefundThe tax result after applying the credits and prepayments to thetax liability is the amount that must be paid tothe Internal Revenue Service or the amount overpaid and to berefunded to the taxpayer.
Difference between Gross income and Taxable incomeGross income is commonly defined as the amount of a companys or a persons incombefore all deductions or any taxpayer’s income, except that which is specifically excludeby the Internal Revenue Code, before taking deductions or taxes into account. Forbusiness, this amount is pre-tax net sales less cost of sales. Section 61 of the InternaRevenue Code (Code) defines "gross income" as "all income from whatever sourcderived." Section 61(a) of the Code lists fifteen examples of items included in gross incomehowever, the list is not exhaustive. Therefore, unless the Code specifies that something is excluded from gross incomethe assumption is that it is included. Exceptions to what is included in gross income cabe found under §§ 101-140 of the Code. Each of these sections excludes a particular typof inflow if it meets the criteria stated. For the purpose of a companys description of aemployees income, the term annual earnings may be used because a person may havother sources of taxable income in a year than what is earned from the employer. Foinstance, cashing out a Canadian Registered Retirement Savings Plan results in additionaincome that must be claimed as part of total world income. Taxable Income- The amounof income subject to income taxes; found by subtracting the appropriate deductions (IRAcontributions, alimony payments, unreimbursed business expenses, some capital lossesetc.) from adjusted gross income.
1. Personal exemptionFor single individual or married individual judicially decreed as legallyseparated with no qualified dependents…………..……………..…P 50,000.00For head of family……………….………………………………..………P 50,000.00For each married individual ………………………………..……..……P 50,000.00Note: In case of married individuals where only one of the spouses isderiving gross income, only such spouse will be allowed to claim thepersonal exemption.
2. Additional exemption.For each qualified dependent, a P25, 000 additional exemption can be claimedbut only up to 4 qualified dependents. The additional exemption can be claimedby the following:The husband who is deemed the head of the family unless he explicitly waives hisright in favor of his wifeThe spouse who has custody of the child or children in case of legally separatedspouses. Provided, that the total amount of additional exemptions that may beclaimed by both shall not exceed the maximum additional exemptions allowed bythe Tax Code.The individuals considered as Head of the Family supporting a qualifieddependentNote: Dependent Child” means a legitimate, illegitimate or legally adopted childchiefly dependent upon and living with the taxpayer if such dependent is notmore than twenty-one (21) years of age, unmarried and not gainfully employedor if such dependent, regardless of age, is incapable of self-support because ofmental or physical defect.
REPUBLIC ACT No. 9504An Act Amending Sections 22, 24, 34, 35, 51 and 79 ofRepublic Act No. 8424, as Amended, Otherwise Known asthe National Internal Revenue Code of 1987.
Section 1. Section 22 of Republic Act No. 8424, as amended, otherwiseknown as the National Internal Revenue Code of 1997, is hereby furtheramended by adding the following definition after Subsection (FF) to read asfollows:“Sec. 22 Definitions. – When in this Title:“(A) x x x“x x x“(FF) x x x“(GG)” The term ‘statutory minimum wage’ shall refer to the rate fixed by theRegional Tripartite Wage and Productivity Board, as defined by the Bureau ofLabor and Employment Statistics (BLES) of the Department of Labor andEmployment (DOLE).“(HH)” The term ‘minimum wage earner’ shall refer to a worker in the privatesector paid the statutory minimum wage, or to an employee in the publicsector with compensation income of not more than the statutory minimumwage in the non-agricultural sector where he/she is assigned.”
Sec. 2. Section 24(A) of Republic Act No. 8424, as amended, otherwise known as theNational Internal Revenue Code of 1997, is hereby further amended to read as follows:“Sec. 24. Income Tax Rates. –“(A)” Rates of Income Tax on Individual Citizen and Individual Resident Alien of thePhilippines. –“(1) x x x“x x x; and“(c) On the taxable income defined in Section 31 of this Code, other than income subject totax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from allsources within the Philippines by an individual alien who is a resident of the Philippines.“(2) Rates of Tax on Taxable Income of Individuals. – The tax shall be computed inaccordance with and at the rates established in the following schedule:“Not over P10,000 …………………………………… 5%“Over P10,000 but not over P30,000 ………P500 + 10% of excess over P10,000“Over P30,000 but not over P70,000 ………P2,500 + 15% of the excess over P30,000“Over P70,000 but not over P140,000 ……P8,500 + 20% of the excess over P70,000“Over P140,000 but not over P250,000 …P22,500 + 25% of the excess over P40,000“Over P250,000 but not over P500,000 …P50,000 + 30% of the excess over P250,000“Over P500,000 ………………………………………P125,000 + 32% of the excess over P500,000
“For married individuals, the husband and wife, subject to the provision ofSection 51(D) hereof, shall compute separately their individual income taxbased on their respective total taxable income: Provided, That if any incomecannot be definitely attributed to or identified as income exclusively earned orrealized by either of the spouses, the same shall be divided equally between thespouses for the purpose of determining their respective taxable income.“Provided, That minimum wage earners as defined in Section 22(HH) of thisCode shall be exempt from the payment of income tax on their taxableincome: Provided, further, That the holiday pay, overtime pay, night shiftdifferential pay and hazard pay received by such minimum wage earners shalllikewise be exempt from income tax.Sec. 3. Section 34 (L) of Republic Act No. 8424, as amended, otherwise knownas the National Internal Revenue Code of 1997, is hereby amended to read asfollows:“Sec. 34. Deductions from Gross Income. – Except for taxpayers earningcompensation income arising from personal services rendered under anemployer-employee relationship where no deductions shall be allowed underthis Section other than under Section (M) hereof, in computing taxable incomesubject to income tax under Sections 24(A); 25(A); 26; 27(A), (B) and (C); and28(A)(1) there shall be allowed the following deductions from gross income:
“(A) Expenses. –“x x x“(L) Optional Standard Deduction. – In lieu of the deductions allowed under the precedingSubsections, an individual subject to tax under Section 24, other than nonresident alien,may elect a standard deduction in an amount not exceeding forty percent (40%) of hisgross sales or gross receipts, as the case may be. In the case of a corporation subject to taxunder Sections 27(A) and 28(A)(1), it may elect a standard deduction in an amount notexceeding forty percent (40%) of its gross income as defined in Section 32 of thisCode. Unless the taxpayer signifies in his return his intention to elect the optional standarddeduction, he shall be considered as having availed himself of the deductions allowed inthe preceding Subsections. Such election when made in the return shall irrevocable for thetaxable year for which the return is made. Provided, That an individual who is entitled toan claimed for the optional standard deduction shall not be required to submit with his taxreturn such financial statements otherwise required under this Code: Provided, further,That except when the Commissioner otherwise permits the said individual shall keep suchrecords pertaining to this gross sales or gross receipts, or the said corporation shall keepsuch records pertaining to this gross income as defined in Section 32 of this Code duringthe taxable year, as may be required by the rules and regulations promulgated by theSecretary of Finance, upon recommendation of the Commissioner.Sec. 4. Section 35(A) and (B) of Republic Act No. 8424, as amended, otherwise known asthe National Internal Revenue Code of 1997, is hereby amended to read as follows:
“Sec. 35. Allowance of Personal Exemption for Individual Taxpayer. –“(A) In General. – For purposes of determining the tax provided in Section 24(A) of thisTitle, there shall be allowed a basic personal exemption amounting to Fifty thousandpesos (P50,000) for each individual taxpayer.“In the case of married individuals where only one of the spouse is deriving gross income,only such spouse shall be allowed the personal exemption.“(B) Additional Exemption for Dependents. – There shall be allowed an additionalexemption of Twenty-five thousand pesos (P25,000) for each dependent not exceedingfour (4).“The additional exemption for dependents shall be claimed by only one of the spouses inthe case of married individuals.“In the case of legally separated spouses, additional exemptions may be claimed only bythe spouse who has custody of the child or children: Provided, That the total amount ofadditional exemptions that may be claimed by both shall not exceed the maximumadditional exemptions herein allowed.“For purposes of this Subsection, a ‘dependent’ means a legitimate, illegitimate or legallyadopted child chiefly dependent upon and living with the taxpayer if such dependent isnot more than twenty-one (21) years of age, unmarried and not gainfully employed or ifsuch dependent, regardless of age, is incapable of self-support because of mental orphysical defect.
Sec. 5. Section 51(A)(2) of Republic Act No. 8424, as amended, otherwise knownas the National Internal Revenue Code of 1997, is hereby further amended to readas follows:“Sec. 51. Individual Return. –“(A) Requirements. –“(1) Except as provided in paragraph (2) of this Subsection, the followingindividuals are required to file an income tax return:“(a) x x x;“x x x.“(2) The following individuals shall not be required to file an income tax return:“(a) x x x;“(b) An individual with respect to pure compensation income, as defined inSection 32(A)(1), derived from sources within the Philippines, the income tax onwhich has been correctly withheld under the provisions of Section 79 of thisCode: Provided, That an individual deriving compensation concurrently from twoor more employers at any time during the taxable year shall file an income taxreturn:“(c) x x x; and“(d) A minimum wage earner as defined in Section 22(HH) of this Code or anindividual who is exempt from income tax pursuant to the provisions of this Codeand other laws, general or special.
Sec. 6. Section 79(A) of Republic Act No. 8424, as amended, otherwise knownas the National Internal Revenue Code of 1997, is hereby further amended toread as follows:“Sec. 79. Income Tax Collected at Source. –“(A) Requirement of Withholding. – Except in the case of a minimum wageearner as defined in Section 22(HH) of this Code, every employer makingpayment of wages shall deduct and withhold upon such wages a tax determinedin accordance with the rules and regulations to be prescribed by the Secretaryof Finance, upon recommendation of the Commissioner.Sec. 7. Separability Clause. – If any provision of this Act is declared invalid orunconstitutional, other provisions hereof which are not affected thereby shallcontinue to be in full force and effect.Sec. 8. Repealing Clause. – Any law, presidential decree or issuance, executiveorder, letter of instruction, administrative order, rule or regulation contrary to orinconsistent with any provision of this Act is hereby amended or modifiedaccordingly.Sec. 9. Effectivity Clause. – This Act shall take effect fifteen (15) days followingits publication in the Official Gazette or in at least two (2) newspapers of generalcirculation.
How to Compute Income Tax in thePhilippines(Single Proprietorship)Computing income tax expense and payable is different forindividuals and corporations. Taxable corporations may betaxed using a fixed income tax rate. On the other hand, if youare a self-employed professional or an owner of a singleproprietorship business, your income tax expense is computedusing a graduated tax rate. It is a progressive tax which the taxrate increases as the taxable base amount increases. Thismeans that the higher taxable income you have, the higher yourincome tax expense is.
Computation of Income Tax Due and Payable1. Compute your taxable Compensation Income (positive) or excess of Deductions overTaxable Compensation Income (negative).Here is how you will compute it:a. Determine your Gross Taxable Compensation Income. This is the income you earn fromyour employer during the taxable year. If you are earning purely from your business oryou are not employed, then you can leave it blank.b. Determine your premium paid on Health and or Hospitalization, which should notexceed Php 2,400 per year. If none, then leave it blank. *c. Determine your Personal and Additional Exemptions.2. Compute your gross taxable business or professional income. Here is how you willcalculate it.a. Determine your sales, receipts or revenues for the taxable year.b. Determine your cost of sales or cost of services.c. (a) minus (b) will simply give you your gross taxable or professional income.3. Compute your total taxable business or professional income by simply adding result in(2) and your other taxable income.
4. Compute your Net Income. Your Net Income is equal to result in (3) minus your allowabledeductions. Your allowable deductions can be either:a) Optional Standard Deduction – an amount not exceeding 40% of the net sales forindividuals and gross income for corporations; orb) Itemized Deductions which include the following:ExpensesInterestTaxesLossesBad DebtsDepreciationDepletion of Oil and Gas Wells and MinesCharitable Contributions and Other ContributionsResearch and DevelopmentPension Trusts5. Compute you total taxable income by adding the result in #4 (Net Income) to the resultin #1 (taxable Compensation Income or excess of Deductions over Taxable CompensationIncome). If the result is negative or it becomes a loss, then you will not have a tax due forthe taxable year, otherwise, continue to the next step.6. Compute your Income Tax Due. This is also your income tax expense incurred during thetaxable year. Calculate your tax due for the taxable year using the following tax rate table.
7. Compute your Income Tax Payable. This is the tax you are still liable at theend of the year. To calculate your income tax payable, deduct your income taxdue with the following tax credit/payments, if available.8. Compute your Total Payable. If unfortunately, you fail to pay your income taxon or before the due date, the following penalties will be imposed and will beadded to your total amount payable.1. A surcharge of twenty five percent (25%) for each of the following violations:a) Failure to file any return and pay the amount of tax or installment due on orbefore the due dates;b) Filing a return with a person or office other than those with whom it isrequired to be filed;c) Failure to pay the full or part of the amount of tax shown on the return, or thefull amount of tax due for which no return is required to be filed, on or beforethe due date;d) Failure to pay the deficiency tax within the time prescribed for its payment inthe notice of Assessment (Delinquency Surcharge).
Amount of Net Taxable Income RateOver But Not OverP 10,000 5%P 10,000 P 30,000 P 500 + 10% of the Excess over P 10,000P 30,000 P 70,000 P 2,500 + 15% of the Excess over P 30,000P 70,000 P 140,000 P 8,500 + 20% of the Excess over P 70,000P 140,000 P 250,000 P 22,500 + 25% of the Excess over P 140,000P 250,000 P 500,000 P 50,000 + 30% of the Excess over P 250,000P 500,000 P 125,000 + 32% of the Excess over P 500,000 in 2000
2. A surcharge of fifty percent (50%) of the tax or of the deficiencytax, in case any payment has been made on the basis of suchreturn before the discovery of the falsity or fraud, for each of thefollowing violations:a) Willful neglect to file the return within the period prescribed bythe Code or by rules and regulations; orb) In case a false or fraudulent return is willfully made.3. Interest at the rate of twenty percent (20%) per annum, or suchhigher rate as may be prescribed by rules and regulations, on anyunpaid amount of tax, from the date prescribed for the payment.