Deductions from the Gross Estate

Deductions from the Gross Estate are classified as • Claims against insolvent persons
follows: ○ Amount that cannot be collected by the
1. Ordinary deductions estate of the deceased will be the amount
2. Special deductions deductible for estate tax purposes.
3. Share of the surviving spouse, of the decedent is married ○ Provided, that the full amount of the claim is
Ordinary Deductions first included in the Gross Estate.
1. Losses, Indebtedness, Taxes, Etc. (LITE)
a. Losses • Unpaid mortgage or indebtedness on property
• Pertains to "casualty losses" ○ Deductible amount - remaining liability
• Casualty losses - losses arising from acts of God ○ Full value of the property, to which the
• Value of the property loss = deductible amount mortgage or indebtedness attaches to, must be
from the Gross Estate included first in the Gross Estate before any
deduction for such mortgage or indebtedness
can be made
Requisites for Deductibility:
A. Arising exclusively from:
i. Acts of God such as fire, storm, shipwreck and Note: Laging yung mga utang before death lang
other similar casualty yung deductible
ii. Acts of man such as robbery, theft,
embezzlement c. Taxes
B. Not compensated by insurance or otherwise • Accrued prior to the death of the
C. Not claimed as a deduction in an income tax return decedent, but remain unpaid = also
of the estate subject to income tax deductible for estate tax purposes
D. Incurred during the settlement period of the • The following are NOT DEDUCTIBLE:
estate. 1. Income tax on income received
i. Settlement period - Period prescribed by law after death
to file and pay the estate tax (1 year from 2. Property taxes that accrued after
the date of death) death
Note: 3. Estate tax
• The property subject to loss, must be included in
the gross estate for the item to be deductible 2. Transfer for Public Use
• To be deductible, loss should occur at the date of • Amount of all bequests, legacies, devises or
death to 1 year transfer to or for the use of the Government of
the Republic of the Philippines, or any political
subdivision thereof, for exclusively public
b. Indebtedness or Claims against the Estate
purpose.
• Claims against the estate
• The property must first be included in the gross
○ Valid debts and obligations that the estate for this item to be deductible.
deceased person owed to others at the time
of death, which must be paid out of the
estate Reflects the public policy of encouraging
○ May arise out of the following: contributions to the government for public
▪ Contract purposes = deducted
▪ Tort (civil wrong of decedent - injured
party sued for damages) Starting January 1, 2018. Expenses no longer
▪ Operation of law allowed as deduction from the gross of a decedent:
○ Obligations • Funeral Expenses
▪ contracted by the deceased, which is • Medical Expenses
still enforceable after his death, for • Judicial Expenses
which his estate is now liable for.
▪ The indebtedness must not have been
condoned by the creditor or the action
to collect from the decedent must not
have been prescribed.

Date of Death Valuations Rule:

○ The actual claims of the creditors at the
time of death is the amount deductible for
estate tax purposes
○ Regardless of the fact that the said claims
were reduced or condoned through
compromise agreements entered into by the
estate with the creditors. "post-death
developments are not material in
determining the amount of the deduction"

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 Vanishing Deductions
3. Vanishing Deductions (Property Previously Taxed) Formula of Vanishing Deductions:
• Deduction for "property previously taxed" (either estate • VALUE TO TAKE
or donor's tax) ○ Lower between the fair market value at the
• Amount allowed to reduce the taxable estate of a time of death of the decedent and the fair
decedent where a property included in his gross estate market value at the time it was transferred to
was previously received by him, either: him (either by donation or succession)
a. From a prior decedent by way of inheritance • FIRST DEDUCTION
b. From a donor by way of gift or donation
○ The amount of indebtedness on the
property paid for by the current decedent
Note: This is a remedy against double taxation • INITIAL BASIS
• Requisites for Deductibility: ○ The difference between the value to take
a. Death - Present decedent died within five and first deduction
years from the date of death of the prior • SECOND DEDUCTION
decedent or date of gift. ○ The ratio of the initial basis to the gross
b. Identity of property - Property must be the estate multiplied by the sub of LITE and
same as what was inherited or gifted from the transfer for public use
prior decedent ○ (Initial Basis / Gross Estate) * LITE
c. Location - The property must be situated in the
Philippines. • FINAL BASIS
d. Inclusion of the property - The property must ○ The difference between the initial basis and
have formed part of the gross estate in the the second deduction
Philippines of the prior decedent or been • APPLICABLE RATE
included in the total amount of gifts made within ○ Shall depend on the length of time from the
five years before the present decedent's death. first transfer to the death of the decedent
e. Previous taxation of the property - Estate tax
or donor’s tax must have been finally Vanishing Deduction Rates (Applicable Rate):
determined and paid by the prior decedent or Period (from receipt up to decedent's death) Rate
donor.
f. No previous vanishing deduction on the Within 1 year 100%
property - No vanishing deduction must have Beyond 1 year to 2 years 80%
been previously allowed for this property or Beyond 2 years to 3 years 60%
its exchanged equivalent in determining the net
estate of the prior decedent. Beyond 3 years to 4 years 40%
Beyond 4 years to 5 years 20%
Note: There is no need for there to be two succeeding deaths
for the deduction to apply, since the deduction will also Formula:
apply if the property was received as a gift from the Value to take xx
previous owner and the donor’s tax has already been paid
therefor. Less: First deduction (xx)
Note: If property is bought = NOT subject to vanishing Initial Basis xx
deductions (must be a gift or transfer) Less: Second deduction (xx)
Final Basis xx
Applicable rate %
Vanishing Deductions xx

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 Special Deductions
A. Standard Deductions C. Amounts received by Heirs under RA 4917
• Law allows a standard deduction without qualification,
condition, nor requisite, whatsoever Deductions for Non-Resident Aliens
• Amount shall be allowed as an additional deduction • A ratable portion of LITE, regardless of where it was
without need of substantiation incurred or paid, as follows:
• Full amount shall be allowed as deduction for the (GE, Philippines / GE, World) * World LITE
benefit of the decedent • Transfer for Public use
• Allowable amounts under TRAIN Law: • Vanishing deductions
○ Decedent is a citizen or resident - 5,000,000 • Net share of the surviving spouse in the conjugal or
○ Decedent is a nonresident alien - 500,000 community property
Note: • Standard deduction - 500,000
→ If gross estate is lower than 5,000,000 there will
automatically be no estate tax
→ Compensation given by the employer to the decedent-
Net Share of the
employee is deductible from gross estate Surviving Spouse
• Net share of the surviving spouse to such property
B. Family Home shall be deducted from the net estate of the
• Family Home decedent
○ House and the land where the decedent and • Gross estate of a married individual will consist of
their family reside. his exclusive properties and the conjugal properties,
○ This must be certified by the Barangay Captain (determined based on marital property relations)
of the locality • 1/2 or 50% of the conjugal property after deducting
• Permanency Requirement ordinary deductions only from gross estate
○ Family home must have been actually occupied
as a residence and remains a family home as Note: Share of the surviving spouse must be removed to
long as its beneficiaries continue residing there ensure that only the decedent's interest is taxed.
○ Characterized by permanency - place to which,
whenever absent for business or pleasure, one
still intends to return
• Amount allowable as deduction:
○ Whichever is lower of P10,000,000 or the fair
market value at the time of the decedent's death
• Unmarried Head of a Family (may also avail the
deduction)
○ Individual who is legally single but has
dependents (parents, siblings, or children) living
with them and relying on them for financial
support
▪ Dependents - must meet criteria like age or
inability to support themselves due to
disabilities
• Limitations
○ A person can claim only one family home for
deductions purposes
○ Married - only the interest of the decedent shall
be deductible (House value is 20m, share of the
married decedent is only 10m)
• Requisites for deductibility:
○ Decedent was either married or if single, was a
head of the family
○ Family home must be owned by the decedent,
and its fair market value must be part of the
gross estate
○ At the time of death, it must have been the
decedent's actual residence, verified by the
Barangay Captain
○ Deduction is based on the home's fair market
value, but not exceeding 10,000,000

Note:
→ The idea behind this deduction is to ensure that
families do not lose their primary residence due
to estate tax obligations of the property owner
→ To provide financial relief by reducing the taxable
estate of a deceased person
→ Family home must be included first in the gross estate
Example:
Conjugal family home - 5m
Exclusive land of decedent - 7m
Deductible Family home = 9.5m (2.5 + 7m)

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