Chapter 14-Regular Income Taxation: Individuals

CHAPTER 14
REGULAR INCOME TAXATION: INDIVIDUALS

Chapter Overview and Objectives

All tax rules relevant to income taxation of individuals are already covered in Previous chapters. This
chapter aims to provide an integration of all income tax Rules which are specifically relevant to
individual taxpayers in order to simulate a Closer to reality depiction of individual income taxation in
practice.

After this chapter, readers are expected to demonstrate mastery on the following:
1. Determination of tax under the regular income tax option
2. Determination of tax under the 8% income tax option
3. Preparation of quarterly and consolidated or adjustment return
4. Rules relevant to taxable estates and trusts
5. Rules on installment payment of the regular tax

INDIVIDUAL INCOME TAXATION

The Regular Income Tax for Individuals

The income tax of individuals is determined through the following tax table:

Year 2018 to Year 2022

Taxable income Tax due
P250,000 and below None (0%)
Above P250,000 to P400,000 20% of excess above P250.000
Above P250,000 to P400,000 P30,000 + 25% of excess over P400,000
Above P400,000 to P800,000 P130,000 + 30% of excess over P800,000
Above P800,000 to P2,000,000 P490,000 + 32% of excess over P2,000,000
Above P8,000,000 P2.410.000 35% of excess over P8,000,000

Year 2018 to Year 2022

Taxable income Tax due
P250,000 and below None (0%)
Above P250,000 to P400,000 15% of excess above P250.000
Above P250,000 to P400,000 P22,500 + 20% of excess over P400,000
Above P400,000 to P800,000 P102,000 + 25% of excess over P800,000
Above P800,000 to P2,000,000 P402,500 + 30% of excess over P2,000,000
Above P8,000,000 P2.205.500 35% of excess over P8,000,000

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Repeat of the personal exemption

The TRAIN law repealed the concept of personal exemption in order to simplify the tax system However
It cannot be denied that individuals incur personal expenses such as cost of living in order to survive
Theoretically, the law must have to make provision for this in order not to kill the goose that lays the
golden egg

In lieu of personal and cost of living expenses of individuals, the TRAIN law provides for the P250,000
annual income exemption for every individual. This amount is inserted in the tax table and is
automatically granted for ever Individual subject to regular income tax. There is no more separate
accounting of personal exemptions

TAXPAYERS SUBJECT TO PROGRESSIVE INCOME TAX

The progressive income tax for individuals covers the following:
1. Citizens
a. Resident citizen
b. Non-resident citizen
2 Aliens
a. Resident allen
b. Non-resident alien engaged in business
3. Taxable estate
4. Taxable trust

CLASSIFICATION OF INDIVIDUAL INCOME TAXPAYERS

For purposes of the regular tax, individual income taxpayers are classified as:
1 Pure compensation income earner
2. Pure business of professional income earner
3. Mixed income earner

PURE COMPENSATION EARNER

The compensation income of employees, except minimum wage earners. Is subject to withholding tax
on compensation Every employer is mandatory required to deduct the withholding tax from the
compensation income of their employees

Treatment of the withholding tax on compensation

1.Full payment- if the employee has no other income and the tax is withheld.
2 Tax credit - if the employee has other taxable income or if the tax is not correctly withheld.

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Chapter 14-Regular Income Taxation: Individuals

Employees with no other income

If the employee has to other taxable income, he may avail of the substituted filling system. Under this
system, the withholding tax on compensation is considered enough evidence of tax compliance of the
employee, provided that the employer withheld the correct tax

Conditions of the Substituted Filing System

1.The employee received purely compensation income during the year.
2.The employee received the income from only one employer in the Philippines during the taxable year.
3.The amount of tax due from the employee at the end of the year equals the amount of tax withheld by
the employer (i.e correct tax is withhold).
4.The employee's spouse also complies with all 3 conditions stated above
5. The employer files the annual information return (HR Form No, 1600-CF)
6.The employer issues BIR Form No. 2316 to each employees

Employees who do not meet the conditions of the substituted filing system shall file the annual or final
adjustment return not later than April 15 of the following year and claim Form 2316 as tax credit.

Consolidated or Adjustment Return

Consolidated or adjustment return is needed when:
1. Correct tax is not withheld
2. Employee or his spouse has other income

Correct tax due not withheld by employer

The correct tax due of the employee will least likely to be withheld by the employer in the following
cases:
1. Concurrent employment
2. Successive employment during the year
3. Incurrence of error by the employer

An annual return needs to be filed to adjust the tax due to the correct amount of tax. This is referred to
as an adjustment return. The employee shall claim Form 2316 as tax credit and pay residual tax due or
claim excess withheld amount as tax credit or tax refund.

Illustration 1. Concurrent employment

Rhadvic Estoque is both employed in Yousee Company and in Youbee Company he Is the following
income and withheld tax during the years:
Yousee Youbee
We compensation income P450.000 P350.000
Withheld tax P42,500 P20.000

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Chapter 14-Regular Income Taxation: Individuals

Mr. Estoques consolidated income tax shall be computed as follows:

Taxable compensation income (P450,000+ P350,000) P 800,000

Income tax due, per individual tax table P 130,000

Less Tax withheld by employers (P42,500+P20,000) 62,500
Income tax payable or (refundable) P67.500

Illustration 2: Successive Employment

In 2020. Zeus resigned from Blue Moon Company and transferred employment Gagamba Company. The
following were his income:

Blue Moon Gagamba

Taxable compensation income P 300,000 P400,000
Tax withheld from compensation 10,000 30,000

Zeus shall file a consolidated return covering his total 2020 income from both employment and pay the
residual tax as follows:

Taxable compensation income (P300,000. P400,000) P700.000

Income tax due, per individual tax table P105,000

Less Tax withheld by both employers 40.000
Income tax payable or (refundable) P65.000

Illustration 3: Employer error

In 2020, left's employer withheld a total of P6,000 out of his P460,000 taxable compensation income

Since the tax withheld is erroneous, Jerr shall file an annual adjustment return and pay residual tax due
orclaim refund or tax credit for excess withholding as follows:

Taxable compensation income P460.000

Income tax dues per individual tax table P45.000
Less Tax withheld by employers ( 56,000)
Income tax payable or (refundable) (P 11,000)

Jeff still use BI Form 1700 as adjustment return.

Employees has other taxable income
Employees other income subject to regular tax may come from:
a. Casual sources
b. Engagement in business or practice of a profession
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Chapter 14-Regular Income Taxation: Individuals

If the has other taxable income, the employee is mandatorily required to The an annual income tax
return to incorporate other income sources in his return This referred as a consolidated income tax
return.

The consolidated income tax return may either be

1. BIR Form 1700 - if the employee is not engaged in business or profession
2. BIR Form 1701 for mixed income earners - if the employee is also engaged in business and or
profession

The withholding tax on compensation (BIR Form 2316) given by the employer shall be claimed as tax
credit

Illustration- With other casual income

Mr Seo Milo a sales executive. He received the following compensation and benefits from his employer:

Gross competition income P987.000

Exempt benefits 84,000
Fringe benefits (paid personal vacation) 81.000
Mandatory deduction for SSS, Phil Health, HDMF 40.000
Total withholding tax deducted under Form 2316 145.750

He also derived the following other income:

Interest income from bonds,net of 204 withholding tax P 72,000

Interest income from bank deposits net of 2096 final tax 16,000
Gain on sale of arts collection (held 3 years) 124,000
Total income P 212.000

Mr. Milo shall file BIR Form 1700 to include his other income subject to regular tax:

Interest income from bonds (P72,000/80%) P90,000

Gain on sale of arts collection (P124.000 x 50% long term) 62.000
Other income P152.000

Note: The fringe benefits of an executive- managerial employee and the interest income from deposits
are subject to final tax. These are excluded in gross income subject to regular tax. The associated fats are
not creditable

The tax credits shall be:

Withholding tax on compensation (Form 2316) P 145,750
Withholding tax on the interest (P90K x20% under Form 2307) 18,000
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Chapter 14-Regular Income Taxation: Individuals

Mr Milo's taxable income shall be computed as:

Gross compensation Income P 987,000
Less. Mandatory deductions 40,000
Exempt benefits 84.000 124.000
Taxable compensation income P 863,000
Add: Other income subject to regular tax 152.000
Taxable income P1,015.000

Mr. Milo's income tax still due shall be computed as:

Income tax due P 194,500
Lese Tax credit:
Form 2316 P 145,750
Form 2307 18.000 163.750
Income tax still due P30.750

The consolidation procedures of employees engaged in business or practice of a profession will be

discussed under mixed income earners.

PURE BUSINESS AND/OR PROFESSIONAL INCOME EARNER

Individual taxpayers engaged in business or practice of profession shall file quarterly income tax returns
(BIR Form 17010) and an annual tax return:
Quarterly Tax Returns Deadline
1st Quarter ITR - 17010 May 15 of the same calendar year
2nd Quarter ITR - 17010 August 15 of the same calendar year
3rd Quarter ITR 17010 November 15 of the same calendar year
Annual ITR-1901A April 15, next year

The taxable income from business or profession may be computed using:

1. Itemized deductions
2 Optional standard deduction
Illustration 1 - Itemized deduction
Mrs. Macipag, a self employed taxpayer, had the following quarterly income details:
Jan-March April-lune July-Sept Oct-Dec
Grass receipts P500,000 P 520,000 P 550.000 P 580,000
Less: Cost of services 120.000 200.000 250.000 270.000
Gross income P380.000 P320.000 P 300.000 P310,000
Less Expenses
- Business expenses P 100,000 P 130 000 P 120.000 P 140,000
-Personal expenses 60.000 63.000 58.000 85.000
Total P.160.000 P193,000 P 178.000 P225,000
Net income P220,000 P127,000 P122,000 P 85,000
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Jan- March April-june july-Sept. Oct.-Dec.

Withholding tax P 4,000 P 10.000 P15.000 P14,000

His early and annual taxable income and tax due shall be computed on his
cumulative year to-date taxable income as follows
1st Qtr. 2nd Qtr. 3rd Qtr. Annual ITR
Gross receipts P 500,000 P 1.020,000 P 1.570,000 P 2,150,000
Less: Cost of Sale 120.000 320.000 570.000 849.000
Gross income P 380,000 P 700,000 P 1,000,000 P 1.310,000
Less: Deduction 100.000 230.000 350.000 490.000
Taxable net income P280.000 P 420.000 P 550.000 P 820.000

Income tax due P6 ,000 P 47,500 P 92.500 P136,000

Less Tax credits
- CWT this quarter P 4,000 P 10,000 P 15,000 P14,000
- CWT prior quarters 0 4.000 14.000 P 29.000
Total credits P 4.000 14.000 P 29.000 P43,000
P 2,000 P 33,500 P 63,500 P93,000

Less: Estimated tax paid

In prior quarters 0 2,000 33,500 63,500
Income tax still due P2,000 P 31,500 P 30.000 P29,500

Illustration 2 - Optional standard deduction

Let as assume the same data in the preceding problem, except that the taxpayer opted In use the
optional standard deduction.
The quarterly and annual taxable income and tax due shall be computed as follows:
1st.Qtr. 2nd Qtr. 3rd Qtr. Annual LITR
Gross receipt P 500,000 P 1.020,000 P 1.570,000 P 2.150,000
Less: OSD-40% 200,000 408,000 628,000 860,000
Taxable net income P 300,000 P612,000 P 942,000 P1,290,000
Income tax due P 10,000 P 83,000 P 172,600 P277.000
Less Tax credits
- CWT this quarter P 4,000 P 10,000 P 15,000 P14,000
- CWT prior quarters 0 4.000 14.000 P 29.000
Total credits P 4,000 P14,000 P 29,000 P43,000
P6 ,000 P 69,500 P 143.600 P234,000

Less: Estimated tax paid

In prior quarters 0 6,000 69,500 143,500
Income tax still due P6,000 P 63,000 P 74.000 P90,500
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Chapter 14-Regular Income Taxation: Individuals

Excess quarterly estimated tax

The excess quarterly estimated tax payments over the quarterly tax due may. At the option of the
taxpayer, be carried forward to quarters of the succeeding taxable year or claimed through tax refund.
The option must be indicate indicated in the annual adjustment return. Once the option to carry over is
made is made, it becomes irrevocable for that period.

The option to refund

The option to refund may be in the form of cash or a tax credit certificate. If the option to refund is
selected, the excess refundable amount should not be carried over as tax credit to the succeeding
quarters of the following year.

MIXED INCOME EARNER

The compensation income of mixed income earners will be subjected to the withholding tax on
compensation by their employers. Mixed Income earners would report their business or professional
income on a quarterly basis under Form 17010. The compensation income shall not be reported in the
quarterly return. It shall be included only in the annual consolidated return Mixed income taxpayers
shall use BIR Form 1701.

Illustration
To facilitate our discussion, let us assume the same data in the previous illustration except that Mrs,
Macipag is also employed with the following income during the year.

Employment Jan- March April-june july-Sept. Oct.-Dec.

Taxable compensation P150,000 P 160,000 P 165,000 P 180,000
Withholding tax on compensation (Form 2816) - 93.750

Business
Gross income P 380,000 P 320,000 P 300,000 P 310,000
Itemized deductions 100.000 130.000 120.000 140.000
Net income P 280.000 P 190.000 P 180,000 P170,000

Form 2307s P 4.000 P 10,000 P 15,000 P 14,000

Quarterly tax
Mrs. Macipag shall report her quarterly income from business or profession and pay the same quarterly
income tax due as computed in the previous illustration:
Jan- March April-june. july-Sept. Oct.-Dec.
Quarterly income tax due P P 2,000 P 31.500 P 30,000 P ???

Annual income tax

The taxable income of Mrs, Macipag for the year shall be computed as:
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Chapter 14-Regular Income Taxation: Individuals

Taxable compensation income P987l000

Gross income 1,310,000

Less: Deductions 490,000
Net income P 820,000
P1,807,000

Mrs, Macipag shall file BIR Form 1701 for her consolidated income. Her annual income still due shall be
computed as:

Income tax due P432,100

Less Tax credit
WH tax on compensation (Form 2316) P 93,750
Expanded withholding tax (Form 23079) 43.000
Estimated tax payments (Form 17010) 63.500 200,250
Income tax still due 231.850

THE 8% INCOME TAX OPTION

The TRAIN Taw introduced a new tax scheme for individual taxpayers - the 8% optional income tax. The
option to be taxed at 8% must be indicated in the first quarter income tax return or in the first quarter
percentage tax return. When made, the option shall be irrevocable for the calendar year.

Nature:
1 A bundled tax - it is in lieu of
a. Regular income tax determined through the income tax table
b.3% general percentage tax
2. An annual option
It is valid for as long as the taxpayer remained as a non-VAT taxpayer during the year. It will be
invalidated in favor of the regular income tax once the taxpayer becomes a VAT taxpayer during the
year.

3. Paid quarterly and annually

Scope:
a. Pure business or professional income earners
b. Mixed Income earners

Business Tax: A Basic Overview

Aside from income tax, individuals engaged in business or exercise of a profession are also required to
pay a business tax which is either a 3% percentage tax or as 12% value added tax (VAT).
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Chapter 14-Regular Income Taxation: Individuals

Types of business taxpayers:

1. Exempt businesses - not subject to VAT or percentage tax
Examples:
a. Businesses selling agricultural products in original state.
b. Agricultural contract grower's.
c. Book publishers or bookstores
2. Business specifically subject to other percentage taxes - not subject to a but subject to percentage
tax of various rates
Examples:
a. Common carriers by land, such as taxi, jeepney, bus and car for hire
b. Operators of cockpits, cabarets, clubs, jai-alai or horse race track
3. Vatable businesses - other businesses
Vatable businesses either pay:
a. 1296 value added tax - if their annual sales exceed P3,000,000 or whenthey registered as VAT
taxpayers
b.3% general percentage tax - if their annual sales do not exceed the P3,000,000 and did not opt
to voluntary register as VAT taxpayers

Business taxation is an advanced tax topic which will be discussed under Business & Transfer Taxation by
the same author.

Normally, businesses or professional practitioners start small as non-VAT taxpayers. As their business or
practice gains traction and reach the P3M VAT threshold, they are mandatorily required to register as
VAT taxpayers.

Covered businesses:
Only vatable businesses who are below the P3M annual VAT threshold and did not register as VAT
taxpayer can opt to be taxed under the 8% income tax.

Thus, the option is not available to:

1. VAT-registered business taxpayers
2. VAT exempt business taxpayers such as:
a. Exempt businesses
b. Businesses specifically subject to other percentage taxes
3. Individuals receiving income not subject to business tax, such as:
a. Partners receiving share in net income of a general professional partners
b. Co-owners receiving share of income in co-owned properties
c. Venturers receiving share in net income of an exemption venture
d. Heirs or beneficiaries of trust receiving income distribution from estate
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Chapter 14-Regular Income Taxation: Individuals

Tax obligations of individual non VAT taxpayers

Regular tax option 8% Income tax option
Regular income tax 3 quarterly 1701Qs and 1 annual 3 quarterly 1701Qs and 1
1701A annual 1701A
Percentage tax 4 quarterly 1551Q None

VAT-registered taxpayers pay VAT and regular income tax.

Tax basis:
The 8% optional income tax shall be based upon the gross sales or gross receipt Of the individual
taxpayer that is subject to 3% percentage tax Other income subject to regular tax are added to the basis.

Pure business or professional income earner

For pure business or professional income earners, the use of the 8% income tax would effectively deny
the individual taxpayer of his P250,000 annual income exemption, the same being embedded in the
regular tax table. Due to this, the 8% income tax shall be computed from the basis net of P250,000.

Illustration
Assume a taxpayer who is purely engaged in business had sales of P2,000,000, P100,000 other income
subject to regular tax and expenses of P 840,000.

The 8% income tand would be computed as:

Gross sales or gross receipts P 2,000,000

Add: Other taxable income subject to regular tax 100.000
Total P 2.100,000
Less Annual exempt income ( 250.000)
Net total P 1,850,000
Multiply by: Optional income tax rate 8%
8% Income tax P 148.000

Mixed Income earner

Compensation income is not subject to business tax. Hence, it cannot be subjected To the 8%income tax
Due to this the income tax due from compensation shall be Separately determined using the income tax
table while the 8% income tax from the business or profession shall be separately computed. For this
purpose, the classification rule as discussed in prior chapters must be observed

Since the use of the income tax table in computing the tax due from compensation Effectively allowed
the taxpayer claim of P250,000 annual income exemption as Embedded in the tax table, there will be no
more P250,000 deduction allowable.
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Chapter 14 - Regular Income Taxation Individuals

against the basis of the 8% income tax Furthermore, if the amount of compensation income does not
exceed P250,000, the unutilized deduction cannot be deducted against business income since the
TRAIN law did not contemplate a deduction cross-over.

Illustration 1
A mixed income earner realized P920,000 from compensation, P2,000,000 in sales P100,000 other
income subject to regular tax and incurred P480,000 in expenses.

The income tax due under the 896 income tax option shall be computed as:

Income Tax due

Taxable compensation income P920,000
Less: Lower tax bracket in tax table 800,000 P130,000
Residual income 120,000
Multiply by: Incremental tax rate 30% 36,000
Income tax due on compensation income P166,000

Gross sales or grass receipts P 2,000,000

Add: Other income subject to regular tax 100,000
Total P 2,100,000
Multiply by: Optional income tax rate 8% 168,000
Income tax due P334,000

Illustration 2
A mixed Income earner realized P2,000,000 in sales, P100,000 in other income subject to regular tax and
earned P150,000 compensation from part-time employment.

Income Tax due

Taxable net income P150,000
Less: Lower tax bracket in tax table P250.000 P 0
Excess (100,000)
Income tax due from compensation P 0
Gross sales or gross receipts P 2,000,000
Add: Other income subject to regular tax 100.000
Total P 2,100,000
Multiply by: Optional income tax rate 8% 168,000
Income tax due P 168.000

Note: The P100.000 excess of P250,000 over the compensation income cannot be com against the basis
of the 8% No deduction cross-over is allowed
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INTEGRATED ILLUSTRATION
Integrated Illustration 1 - Pure business or professional income corner
Mr, Cardenas a proprietor of a furniture shop recorded the following income statement in 2020
Net sales of finished goods, net of P 18.000 CWTS P 2,382,000
Sales of scraps and trimmings 200.000
Total Sales Revenues/Receipts/Fees P 2,582.000
Less:Cost of sales or services 1.200.000
Gross income from Business/Profession P 1.392.000
Other income
Dividend income P12,000
Gain from sale of stocks, net of capital gains tax 68,000
Interest income from deposits 16,000
Gain on sale of machinery held for 6 years 40.000
Gain on sale of bonds held for 2 years 20,000
Interest income from bonds 14,000 170,000
Total Income P 1.552.000
Less Administrative and selling expenses 600.000
Net income P952.000

Regular Tax Option

The 2020 taxable net mcome of Mr. Cardenas shall be computed as follows
Net Sales/Revenues/Receipts/Fees (12,382,000 + P18,000) P 2.400,000
Add: Other taxable income from operations - Scrap sales 200.000
Total Sales/Revenues/Receipts/Fees P 2,600,000
Less cost of sales or services 1.200.000
Gross Income from Business Profession P 1.400,000
Add: Non-operating income subject to regular tax
Gain on sale of machinery P 40.000
Gain on sale of bonds (P2OKx50%long-term) 10,000
Interest income from bonds 14.000 64.000
Total Gross Income 1,461,000
Les Allowable deductions (Business expenses) 600.000
Taxable net income P864.000

Under the regular tax option, he would pay the following for 2020
Regular income tax
Taxable net income P 864,000
Less: Lower limit of the income bracket
Where the taxable income qualifies P800.000 P 130,000
excess
Multiply by bracket marginal rate 30% 19,200
Income tax due P 149,200
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Chapter 14 - Regular Income Taxation Individuals

b.3% business tax P 2,600,000

Net Sales/Revenues/Receipts/Fees 3%
Multiply by: Percentage tax rate P 78.000

Total percentage tax due P 227.200

The regular income tax would be paid in three quarterly tax filing (1701Q) and as annual income tax
return (1701). The 3% percentage tax will be paid in fast quarterly percentage tax returns (25510).

The 8% Income Tax Option

Under the 8% income tax option, he would pay the following

Total Sales/Revenues/Receipts/Fees P 2,600,000

Add: Non-operating income subject to regular tax
Gain on sale of machinery P40,000
Gain on sale of bonds (P2015096 - long-term) 10,000
Interest income from bonds 14.000 64.000
Total Gross Income P 2,664,000
Less: Individual income exemption on income tax 250.000
Total P 2,414,000
Multiply by: Optional income tax rate 8%
Income tax due P 193.120

While it appears that the 8% option is the better option in the illustration, it is notalways the case. At the
start of the year wherein the option is made you could not tellfor sure which option would yield the
lesser tax except only if you have accurateinformation systems that enables accurate forecasting of
future performance.

Integrated Illustration 2 -Mixed income earner

To facilitate our illustration, we shall assume the same data in the previous illustration except Mr.
Cardenas also earned P1,200,000 in compensation income in 2020,

a. Regular Tax:
Under the regular tax option, he would pay the following for 2020: P 1,200,000
Taxable net income 864,000
Taxable net income P2.064,000
Less: Lower limit of the income bracket
where the taxable income qualifies 2,000,000 P 490,000
Excess P 64,000
Multiply by: bracket marginal rate 32% 20,480
Total income tax due P 510,480
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Chapter 14- Regular Income Taxation Individuals

b. 3 business tax:
Net Sales/Revenues/Receipts/Fees P 2,000,000
Multiply by: Percentage tax rate 3%
Total percentage tax due 78,000

Total tax paid under the regular option P 588,480

The 8% Income Tax Option

Under the 8% income tax option, he would pay the following
a. Regular income taxi
Taxable compensation income P1200,000
Less: Lower limit of the income bracket
where the taxable income qualities 800,000 P 130,000
Excess P 400,000
Multiply by: bracket marginal rate 30% 120,000

Total income tax due on compensation income P 250,000

b. business tax:
Net Sales/Revenues/Receipts/Fees 2,600,000
Add: Other income subject to regular tax
Gain on sale of machinery P 40,000
Gain on sale of bonds 10,000
Interest income from bonds 14,000
Total 2,664,000
Multiply by: Percentage tax rate 8% 213,120

Total tax paid under the regular option P 463,120

INTERIM TRANSITION TO THE VALUE ADDED TAX

Individuals exceeding the P3M VAT threshold during the year mandatorilyRequired to change
registration from an VAT to a VAT taxpaver before the end ofthe month following the month the
taxpayer exceeded the P3,000,000 threshold

The taxpayer shall pay regular income tax for his income during the entire year and pay VAT
prospectively starting the month he became a VAT taxpayer. The 8%income tax payment shall be
considered as tax credit against the regular income tax due. The tax payer shall be required to pay the
3% percentage tax for sales op receipts generated before becoming a VAT taxpayer.

Illustration
Mr. Quito. a pure business Income earner, opted to the income tax to the first
to June of 2020, In June exceeded the P3M VAT threshold
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Chapter 14 - Regular Income Taxation: Individuals

Jan- March April-June July-Sept.

Sales P 1.200.000 P 2,000,000 P 1,000,000

Cost of sales 600.000 1.000.000 500,000
Gross profit P600.000 P1.000.000 P500,000
Gain on sale of domestic stocks 20,000
Gain on sale of used equipment __________ 40.000 __________
Total income P 620,000 P 1,040,000 P 530,000
Less: Expenses 320,000 450.000 300.000
Net income P 300.000 P 590.000 P 230.000

1st Quarter (January to March)

Mr. Quito's first quarter total tax due under the 8% income tax shall be:

Sales P1,200,000
Less. 250,000
Total P 950.000
Multiply by: Optional income tax rate 8%
Total income tax due P 76,000

2nd Quarter (April to June)

Mr. Quito exceeded the P3M VAT threshold. He shall be subject to regular tax and
required to pay percentage tax on sales or receipts made since January 1.

The percentage tax due shall be:

Total sales from January to June P 3.200,000

Multiply by: Percentage tax rate 3%
Total percentage tax due P 96,000

The taxable income of Mr. Quito in the second quarter shall be computed as follows

Sales P 3,200,000
Less: Cost of sales 1,600,000
Gross income from operations 1,600,000
Other income subject to regular tax 40.000
Total income subject to regular tax P 1640,000
Less:
Deductions (business expenses) P 770,000
Percentage tax expense 96.000 866,000
Taxable income P 774,000
 594
The 2nd quarter tax due of Mr. Quito shall be computed as:
Income Tax due
Taxable: income P 774,000
Less: Lower tax bracket P 400.000 P 30.000
Excess P 374,000
Multiply by: Incremental tax rate 25% 93.500
Total tax due P 123,500
Less: Tax due in 1st Quarter 76.000
Income tax still due P 47.500

Mr. Quito shall separately pay the P96,000 percentage tax which shall be assessed Upon VAT
registration with the P47.500 income tax. Mr. Quito shall pay the VAT effective July 2020. The VAT
system will be discussed extensively under Business & Transfer Taxation

The 3rd Quarter (July to September)

Sales P 4.200,000
Less: Cost of sales 2,100,000
Cross income from operations P 2 ,100,000
Other income subject to regular tax 40.000
Total income subject to regular tax P 2,140,000
Less:
Deductions (business expenses) P 1.070,000
Percentage tax expense 96.000 1,166,000
Taxable income P 974.000

The 3rd quarter income tax due of Mr. Quito shall be computed as:
Income Tax due
Table tax income P 974,000
Less lower tax bracket 800,000 P 130,000
Excess P 174.000
Multiply by: Incremental tax rate 30% 52,200
Total tax due P 182,200
Less Tax due in 2nd Quarter 123.500
Income tax still due P 58.700

Mr. Quito shall separately pay the quarterly VAT aside from the P58,700 income tax the same process
will be followed until the annual income tax return.
 595
Chapter 14- Regular Income Taxation: Individuals

TAXABLE ESTATES AND TRUSTS

Taxable Estates
An estate is an income taxpayer if under Judicial settlement or administration.An estate under
extrajudicial settlement is not a taxpayer. The income of the under extrajudicial settlement is taxable to
the heirs.

Taxable Trusts
A revocable trust is not a taxpayer and is treated as a pass-through entity who income is taxable to the
grantor-trustor.

An irrevocable trust is a separate and distinct taxable entity (BIR Ruling 003:05 July 22, 2005). A taxable
trust is treated as an individual taxpayer and is allowed P20,000 personal exemption

Income taxable to an estate or trust under the NIRC

1. Income accumulated in trust for the benefit of unborn or unascertained person or persons with
contingent interests and income accumulated or held for future distribution under the terms of the will
or trust
2. Income which is to be distributed currently by the fiduciary to the beneficiaries and income collected
by a guardian of an infant which is to be held or distributed as the court may direct
3. Income received by estates of deceased persons during the period of administration or settlement of
the estate
4. Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or
accumulated

Taxable income of the deceased taxpayers

In the case of the death of a taxpayer, there shall be included in computing taxable income for the
taxable period in which falls the date of his death, amounts accrued up to the date of his death if not
otherwise properly includible in respect of such period or a prior period. (Sec 44, NIRC)

Illustration 1: Deceased taxpayer

Miss X died on July 15, 2019. Her estate underwent judicial settlement. She following income in 2019:

Compensation income P 320,000

Rental income 960,000
Total 1,280,000

The decedent leases a property which earns P80,000 monthly rental

The accounting period of the decedent shall be terminated at the date of death, since the estate is
under judicial administration, the estate of the decedent shall be registered as an individual taxpayer.
 596
Thus following income shall be reported to the income tax return of the
Estate of the
Decedent. Decedent
Competition income P 320.000
Rental income (6.5 months x P 80.000) 520,000
Rental income (5.5 months x P 80.000) 440.000
Taxable income P840.000 P 440.000

Note:
1. to July 15, 2019 is 6,5 months while July 16 ta December 31 is 55 months
2. Cut of income at the date of death is necessary not only for proper accounting of income Taxes but
also for estate taxes in estate taxation income accruing before death are part of Gross state while those
accruing after that are excluded

If the estate of the decedent is administered extra-judicially, her heirs will report their Share in the
P440,000 net rentals in their individual tax returns
Illustration 2: Estate
The estate of Mr. Barber has P850.000 gross income before business expenses of P200,000. The estate
administrator distributed P300,000 to the heirs in accordance with the will of Mr. Barbel.

The taxable income of the estate will be computed as follows:

Gross income P 850,000
Less:
Regular allowable deductions P200,000
Special allowable deduction
Income distribution to heirs 300,000 500,000
Taxable net income P 350,000

Note: It must be recalled that income distribution from the estate is a special deduction against the
gross income of the estate. The he's shall include the P300.000 income distribution in their taxable
income

Illustration 3: Trust
Mr. Batman designated in irrevocable trust a property in favor of Robin and appointed superman as
trustee. The property earned P720,000 income before expenses of P200,000 and trust fees of P50,000.
In accordance with the trust indenture, Superman distributed P100,000 to Robin.

Taxable income of the trust shall be computed as follows:

P 720,000
Less: Regular allowable deductions P250,000
Special allowable deduction
Income distribution to beneficiaries 100,000 350.000
Taxable: net income P 370.000
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Chapter 14- Regular Income Taxation: Individuals

Note: Robin will report the P100.000 income distribution in this taxable income. Superman will report
the P50,000 trust fees in his gross income

Consolidation of two or more trusts

Multiple irrevocable trusts designated by the same by the same grantor for the benefit of the same
beneficiary shall be consolidated for purposes of income tax.

The consolidation of irrevocable trusts is necessary to eliminate tax savings the grantor may derive by
deliberately splitting the corpus of the trusts into several trusts into several trusts

Illustration 1
Don Ambrocio designated three trusts all in favor of his daughter, Cindy:
Operating Distribution
Trust Designation Trustee income to Cindy
Trust 1 Irrevocable Aj P400,000 P 40.000
Trust 2 Irrevocable Bj 600.000 60,000
Trust 3 Revocable Cj 400,000 80.000

The trustees of Trust 1 and Trust 2 shall prepare tax returns covering the income of the property held
under their control as follows:

Trust 1 Trust2
Operating income P400,000 P 600,000
Less: Special itemized deduction
Income distribution to beneficiary 40.000 60.000
Taxable income P 360.000 P 540.000
Income tax due per tax table P22.000 P 65.000

For purposes of income taxation, the income of Trust 1 and Trust 2 will be consolidated as follows:

Consolidated
Trust 1 Trust 2 Trust
Taxable net income P360,000 P540.000 P 900.000
Income tax due P160,000
Allocated tax due P 64,000 P 96,000
Less: Income tax paid 22.000 65.000 87,000
Income tax still due P 42.000 P 31.000 P 73,000

The consolidated tax due is allocated to Trust 1 and Trust 2 as follows:

- Trust 1 = P360,000/P900,000 x P160,000 = P64,000
- Trust 2=P540,000/P900,000 x P160,000 = P96,000
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Chapter 14- Regular Income Taxation: Individuals

Trust 3 is not taxable as it revocable. The entire P400,000 income of Trust 3 Including the P80,000
income distribution to Cindy will be included in the taxable name of Don Ambrocio

Illustration 2: Trusts with retention of certain rights

Mr. Masagana designated two trusts as follows:

Trust Beneficiary Designation

Cassandra Irrevocable as to corpus and income, however, Mr. Masagana
Trust (daughter) reserves the power to revest to himself 1/4 of the corpus upon the
1 happening of some specified contingencies
Alexander Irrevocable as to corpus and income except that P30,000 of the
Trust (son) annual income will be used to pay the life insurance premium of Mr.
2 Masagana

Trust 1 and Trust 2 earned P200,000 and P300,000 during the year. Both trusts made distributions to
their respective beneficiaries amounting to P50,000 and P100,000, respectively.

The two trusts will not be consolidated because they involve separate beneficiaries. However, the
grantor shall include in his taxable income any income pertaining to that part of the corpus over which
the grantor has reserved power to revoke. Any income of trusts reserved for the benefit of the grantor
shall likewise be included in the table income of the grantor.

The taxable income of Trust 1 and Trust 2 shall be computed as follows:

Trust1 Trust2
Operating income P 200,000 P 300.000
Less: Special regular itemized deductions
Income pertaining to grantor *50,000 30,000
Distribution to beneficiaries 50.000 100,000
Taxable net income P 100.000 P 170.000

Note:
1. The grantor has reserved power to revoke one quarter of the corps in Trust 1.
2 The P50,000 income pertaining to such part, computed as (P200,000 x ¼) shall be taxable upon the
grantor
3.The 30.000 income which shall be reserved for the payment of the life insurance of the grantor shall
be likewise table to the grantor.

Employee trust funds

An employees' trust which forms part of a pension, stock bonus or profit sharing plan of an employer for
the benefit of some or all of his employees is exempt from income taxes imposed under the NIRC (Sec
60/B), NIRGI must be emphasized that this exemption covers final tax, capital gains tax, and regular
income tax
599
Requisite of Exemption of Employee's trust
1. Contributions are made to the trust by the employer, employees, or both for the purpose of
distributing to such employees the earnings and principal of the fund accumulated by the trust in
accordance with such plan
2. Under the trust instrument, it is impossible at any time prior to the satisfaction of all abilities with
respect to employees under the trust, for any part of the corpus or income to be (within the taxable
year or thereafter)used for or diverted to purposes other than for the exclusive benefit of his employees
3. Any amount actually distributed to any employee or distribute shall be taxable to him in the year in
which so distributed to the extent that it exceeds the amount contributed by such employee or
distribute.

Return of Married Taxpayers

Married individuals shall file a return for the taxable year to include the income of both spouses,
computing separately their individual income tax based on their respective total taxable income. Where
it is impracticable for the spouses to file one return, each spouse may file a separate return of income. If
any income cannot be definitely attributed to or identified as income exclusively earned or realized by
either of the spouses, the same shall be divided equally between the spouse for the purpose of
determining their respective taxable incomes.

Illustration
Mr. and Mrs. Cruz have a house which they rent to tenants earning them P1, 400,000 a year. Mr. Crux is
an accountant while Mrs. Dela Cruz is an employed nurse. Mr.Cruz earned P 2,800,000 before P900, 000
direct costs and P600,000 expenses Mrs. Cruz also earned P1,200,000 compensation Mr. and Mrs. Cruz
compiled the following
Mr. Cruz Mrs. Cruz
Form 23075 P 140,000
Payments under 170105 340,000
Form 23165 P 250.000
Total P 480.000 P 250.000

The income tax and still die from the spouses shall be reported as follows:
Mr. Cruz Mrs. Cruz
Net Sales/Revenues/Receipts/Fees P2.800,000
Add: Other taxable income from operation 0
Total sales/revenues/receipts/fees P2, 800,000
Less: Cost of sales or services 900.000
Gross income from business/profession P2,700,000 p 0
Add: Non-operating income (rental income) P 700,000 P 700,000
Total Gross income P3,400,000 P700,000
600
Chapter 14- Regular Income Taxation: Individuals

Mr.Cruz MrsCruz
Total Gross income P 3,400,000 P 700,000
Less: Allowable deduction 600.000 -
Net income P 2,800,000 P 700,000
Compensation income P 0 P1,200,000
Taxable income P 2,800,000 P 700,000
Income tax due P 746,000 P 460,000
Less: Tax credit 480.000 250.000
Tax still due P266,000 P 110.000
Aggregate amount payable P 3776.000

Income of unmarried minors from property received from parents

The income of unmarried minors derived from property received from a living parent shall be included
in the return of the parent except when:
1 The donor's tax has been paid on such property.
2. The transfer of such property is exempt from donor's tax

INDIVIDUALS WITH PERSONAL EQUITY RETIREMENT ACCOUNTS (PERA)

It must be recalled from Chapter 8 that individuals which contributes to a PERA account is exempt from
income tax on said contribution and are entitled to a tax credit equivalent to 5% of said contributions

Illustration
Mr. and Mrs. Black Label have four qualified dependents. The spouses had the following data during
2020:
Mr.Label Mrs.Label
Gross compensation, net SSS, PhilHealth & HOME P 5 00,000 P 420,000
Withholding tax on compensation income 23,000 13,000
Contributions to PERA account 120.000 80.000
Payments for health insurance 5,000 3,000

The taxable income and tax due of Mr. and Mrs. Label shall be computed as follows:
Mr.Label Mrs.Label
compensation ne mandatory deductions P 500,000 P 420.000
Less: Exempt Qualified PERA contribution 100.000 80.000
Taxable compensation income P 400.000 P 300.000
P30,000 P18,000
Income tax due, per tax table
Less: Tax credits P 23.000 13,000
CWT on compensation 5,000 4,000
5% on Qualified PERA contribution P28,000 P17,000
Total tax credits P2,000 P1,000
Tax still due and payable
601
Note:
1 .Only up to the P100,000 maximum allowable contributions per year could quality as PERA
contributions. The limit is applied on the basis of per individual contributor.
2. The 5% tax credit must be supported by certificate from the PERA account administrator

Return of Persons under Disability

If the taxpayer is unable to make his own return, the return may be made by his duly authorized agent
or representative or by the guardian or other person charged with the care of his person or property.
The principal and has representative or guardian assuming the responsibility of making the return shall
be responsible for penalties provided for erroneous, false, or fraudulent returns.

Signature in the return is presumed correct

The fact that an individual's name is signed to a filed return shall be prima facia evidence for all purposes
that the return was actually signed by him.

ATTACHMENT TO THE ANNUAL INCOME TAX RETURN

For taxpayers claiming the itemized deduction, taxpayers shall fill-up an attachment form. The
attachment form shows the composition of the itemized deductions in the annual income tax returns
plus required disclosures by law or regulations. This is mandatory and shall be filled together with the
income tax return. The required attachments were discussed in Chapter 7

WHEN AND WHERE TO FILE AND PAY TAX

1. For Electronic Filing and Payment System (eFPS) taxpayers

The return shall be e-filed and the tax e-paid on or before the 15th day of April of each year covering the
income for the preceding year using the eFPS facilities through the BIR website:

2. For Non-Electronic Filing and Payment System (non-eFPS) taxpayers

The return shall be filed and the tax paid on or before the 15th day of April each year covering the
income for the preceding year with:
a. Any authorized agent banks (AAB) located within the jurisdiction of Revenue District Officer
(RDO) where the taxpayer is registered
b. Revenue Collection Officer (RCO) under the jurisdiction of the RDD the taxpayer is registered,
if there is no AAB

In case of "no payment returns, the same shall be filed with the RDO where the taxpayer is registered or
has his legal residence or place of business in the Philippines or with the concerned RCO under the same
RDO.

A no payment return pertains to tax returns without a payable such as there

with negative or zero taxable income, those exempt or no operation during.
602
The period, those with tax creditable or refundable, or those with balance payable only on the second
instalment.

3. For non-resident taxpayers

In case the taxpayer has no legal residence or place of business in the Philippines, the return shall be
filed with the Office of the Commissioner or Revenue District Office No. 39, South Quezon City.

NSTALLMENT PAYMENT OF THE REGULAR INCOME TAX

When the tax due is in excess of P2,000, individual taxpayers (except corporations) may elect to pay the
tax in two equal installments:
a. The first installment shall be paid at the time the return is filed.
b. The second installment is due on or before October 15 following the close of the calendar year

If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax
unpaid becomes due and payable together with the delinquency penalties

Illustration 1
An individual taxpayer availing of the installment payment of his income tax had a tax due of P10,000 in
2019. He made quarterly estimated tax payments of P2,400 and was withheld with P2,000 in creditable
withholding taxes.

The first installment which shall be due upon filing of the annual income tax return on or before April 15,
2020 shall be:

Tax due on first installment (P10,000/2) P5,000

Creditable withholding taxes P 2,000
Quarterly estimated tax payments 2400 4.400
Tax payable P600
The second installment which shall be due on or before October 15, 2020 shall be

Tax due on first installment (P10,000/2) P5,000

Illustration 2
In individual taxpayer availing of the installment payment of his 2019 income tax had tax due of P7,000
and was subjected to creditable withholding tax of P4.000.

The first installment is nil. The taxpayer shall file a return, but with no payment.

Tax due on first installment (P7,000/2) P 3,500

Les Creditable withholding tax 4, 000
Tax payable (P 500)

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Chapter 14 - Regular Income Taxation individuals

The second installment due on or before October 15, 2020 shall be:

Tax due on first installment (P7,000/2) P3,500

Less Excess withholding tax in first instalment ( 500)
Tax payable P3,500

Illustration 3 - Late payment

Assume the same facts in the preceding illustration, except that the second install was paid on
November 15, 2020.

The delay in payment shall result in the imposition of the penalties discussed in Chapter 4. The taxpayer
shall pay the following before compromise penalties.

Tax still due P 3,000

Add: Surcharge (25% P3,000) 750
Interest (12% x 61/365 x P3,000) 60
Total amount due P3,810

WHO SHALL FILE THE INCOME TAX RETURN?

1. A resident citizen engaged in trade, business, or practice of profession within and without the
Philippines
2. A resident alien non-resident citizen, or non-resident alien individual engaged in trade, business, or
practice of profession within the Philippines
3. A trustee of a trust, guardian of a minor, executor/administrator of an estate or any person acting in
any fiduciary capacity for any person where such trust estate, minor, or person is engaged in trade or
business
4. An individual engaged in trade or business or in the exercise of their profession and receiving
compensation income as well

WHO ARE NOT REQUIRED TO FILE INCOME TAX RETURN?

1. Minimum wage earners
2. An individual whose gross income does not exceed P250,000
3. An individual whose compensation income derived from one employer does
not exceed P60,000 and the income tax on which has been correctly withheld
4. Individuals whose income has been subjected to final withholding tax such as
in the case of non-resident aliens not engaged in trade or business
5. Pure compensation earners qualified under the substituted filing system

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Chapter 14 – Regular Income Taxation: Individuals

AMEDMENT OF INCOME TAX RETURN

The amounts indicated by the taxpayer in the income tax return are his assertions The same are deemed
final unless amended by the taxpayer. Within three years from the required date of filing of the return,
the taxpayer can amend the same so long as no Letter of Authority for investigation is issued by the BIR
for the examination of his tax return

Amended returns shall not be subject to surcharges for late filing or late payment but shall be imposed
the interest penalties

605