Individual Income Taxation Personal and Additional Exemptions

Individual Income TaxationPersonal and Additional Exemptions LECTURE No. 5 ESTELITA C. AGUIRRE, CPA, MM

Title II, Chapter 7, NIRC Allowable Deductions Personal and Additional Exemptions As amended by R.A. 9504 (effective July 6, 2008) Allowance for Personal Exemption (Sec 35)

Definitions Personal exemption • is an arbitrary amount granted by law to individual taxpayers in general, • representing their personal, family and living expenses • or minimum subsistence for themselves and for their dependents.

Definitions Dependent a legitimate, illegitimate or legally adopted child - chiefly dependent upon and - living with the taxpayer -not more than 21 years of age. -unmarried -not gainfully employed -regardless of age, is incapable of self-support because of mental or physical defect.

Who are entitled to PE? 1. resident citizens 2. resident aliens 3. non-resident citizens with income in the Phil 4. non-resident aliens engaged in trade or business in the Phil

Who are NOT entitled to PE? 1. special aliens with preferential rate of 15% 2. special Filipino counterpart of aliens with with preferential rate of 15% 3. non-resident aliens not engaged in trade or business in the Phil

Personal Exemptions • Sec 35A • For each individual taxpayer P50,000 • Sec 35B • For each qualified dependent (child) P 25,000 • Not to exceed 4 children)

Rules on Personal Exemptions In the case of married individuals where only one spouse is deriving gross income, only such spouse shall be allowed the personal exemption. If both spouses are deriving gross income. Each one is entitled to the personal exemption.

Rules on Personal exemptions • The taxpayer can claim additional exemption • for children only. • Parents, siblings and other relatives who are • Dependents of the taxpayer are not entitled to • Additional exemption

Qualification of a Dependent Child • Sec 35B • Legitimate,illegitimate,legally adopted child must be • 1. chiefly dependent upon and living with the • taxpayer • 2. unmarried • 3. not gainfully employed • 4. not more than 21 years of age • (Note: regardless of age, if incapable of self- • support because of mental or physical defect)

Rules on Additional Exemptions • Can be claimed by only one spouse in the • case of married individuals. • If legally separated, can be claimed by the • spouse who was judicially awarded custody • of the child: Provided, that the total amount of • additional exemption that may be claimed by • both shall not exceed P100,000. • 3. The husband has the right to claim the • additional exemption for the children or to • waive such right in favor of the wife.

Rules on Additional Exemptions • 4. The wife may claim the additional exemptions • under the following situations: • a. The husband has no earnings or income. • b. The husband is non-resident citizen • earning income from outside the Phil only. • c. The husband issues a waiver in favor of the • wife.

Change of Status Rule Sec 35C 1. If a child is born during the year, full additional exemption can be claimed by taxpayer 2. If a child becomes 21, marries or becomes gainfully employed during the year, taxpayer can claim full additional exemption for the year 3. If the taxpayer dies during the year, his estate may claim the personal and additional exemption as if he died at the close of the year

PE for NRAETBP Sec 35D A nonresident alien individual ETBP shall be entitled to a personal exemption in the amount equal to the exemption allowed in the income tax law in his country to citizens of the Phil not residing in such country, not to exceed the amount fixed by law as exemptions for Filipinos.

Rules on PE for NRAETBP Sec 35D The same privilege is accorded a NRAETBP 1. NRAETB are granted PE, only if there is an existing reciprocal agreement between the Phil and his country. 2. If the law of the country allows to Filipinos both basic and additional personal exemption for the purpose of computing income tax on income derived from the country of such NRAETBP

Rules on PE for NRAETBP • Sec 35D • 3. The amount of the allowed personal exemptions to consider shall be the lower amount between the personal exemption granted under the tax laws of his country and the personal exemptions granted by the tax laws of the Phil. • 4. He must file a true and accurate tax return of the • total income received by him from all sources within the Phil.

Rules for Parents & Children 1. A Minor child who is gainfully employed shall file his/her own return through the parents/guardian. 2. Income from donated properties by parents shall be included in the ITR of the child if donor’s tax has already been paid or if the transfer of property is exempt from donor’s tax. 3. If donor’s tax has not yet been paid, income from donated properties shall be included in income tax return of donor-parent.

Optional Standard Deduction Section 34L The OSD, which is in lieu of the itemized deductions is a privilege that may be enjoyed by both individuals and corporations. For individuals (RC, RA, NRAEBP, NRC with income from within Phil ): 40% of his gross sales or gross receipts For corporations (DC, RFC) 40% of its gross income as defined under Section 32

Requisites of OSD 1. Unless the taxpayer signifies in his return his intention to elect OSD, he is considered as having availed of itemized deductions; 2. Such election shall be irrevocable for the taxable year for which the return is made but he can change to itemized deduction in succeeding year/s; 3. One who claims OSD shall not be required to submit with his tax return such financial statements otherwise required by the Tax Code.

Health and/or Hospitalization Sec 34M Premium Payments on Health and/or Hospitalization Insurance can be claimed by individuals classified as an employee, self-employed or both can be claimed by a RC, a RA, NRC having income from within and a NRAEBP.

Conditions and Limitations Conditions and Limitations 1. There must be an actual Health and Hospitalization Premium payments made during the year. 2. The amount of premium shall not exceed P2,400 per year taken by the taxpayer for himself and his family. 3. Said family (husband and wife) has a gross income of not more than P250,000 4. In case of married couple, only the spouse claiming the additional personal exemption can claim HHP. 5. If married couple has no dependent children, then the husband shall claim unless he waives it for wife.

Compensation Gross Compensation Income Less: Health/Hospital Insurance Premium* Less: Personal and Additional Exemptions Taxable Net Income x 5 to 32% * allowed only if gross income is not > P250,000 ** OSD, not applicable

Business and Profession(Claiming OSD) Option in lieu of itemized deduction Gross Sales/Receipts Less: 40% Optional Standard Deduction Gross Income Less: Health/Hospital Insurance Premium* Less: Personal and Additional Exemptions Taxable Net Income x 5 to 32% * allowed only if gross income is not > P250,000

Business and Profession(claiming itemized deductions) Option in lieu of itemized deduction Gross Sales/Receipts Less: 40% Optional Standard Deduction Gross Income Less: Health/Hospital Insurance Premium* Less: Personal and Additional Exemptions Taxable Net Income x 5 to 32% * allowed only if gross income is not > P250,000

Mixed Income (Claiming OSD) Gross Sales/Receipts Less: 40% OSD of Gross Sales/Receipts Gross Income Add: Gross Compensation Income Total Business and Compensation Income Less: Health/Hospital Insurance Premium* Less: Personal and Additional Exemptions Taxable Net Income x 5 to 32% * allowed only if gross income is not > P250,000

Mixed Income(claiming Itemized Deductions) Gross Sales/Receipts Less: Cost of Sales Gross Income Less: Itemized allowable deductions Net Income Add: Gross Compensation Income Total Business and Compensation Income Less: Health/Hospital Insurance Premium* Less: Personal and Additional Exemptions Taxable Net Income x 5 to 32% * allowed only if gross income is not > P250,000

Income Taxation End of presentation . . . estelitaaguirre@yahoo.com

Individual Income Taxation Personal and Additional Exemptions