Individual Taxation, Exemption and Computation

Mapua Institute of Technology – MakatiSS12

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Chan, 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 tax liability is a necessity in the study of federal income 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 Income Gross income includes all items of income from whatever source unless specifically excluded. Examples of gross income include compensation for services, interest, rents, royalties, dividends, and annuities. An individual’s income from business is included in gross income after deducting the cost of goods sold. Deductions for Adjusted Gross Income To arrive at adjusted gross income, all deductions specically allowed by law are subtracted from gross income. Some of the items allowed as deductions for adjusted gross 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, and

entertainment expenses, and (4) losses from the sale or exchange of property.

Adjusted Gross Income In the tax formula there are deductions for adjusted gross income and then deductions from adjusted gross income. It is important to take these deductions in the proper categories. Adjusted gross income is an important subtotal because certain other items are based on the amount of adjusted gross income.

Itemizing v. Standard Deduction

Itemized deductions allowed as a deduction include: medical expenses, state and local income taxes, property taxes, mortgage interest, charitable contributions, personal casualty losses, and miscellaneous employee expenses. The standard deduction is a fixed amount based on the fi ling status of the taxpayer and is adjusted annually for inflation. Taxpayers subtract the larger of their itemized deductions or the standard deduction. For 2011, the standard deduction 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 married taxpayers fi ling separately.

Personal Exemptions Individual taxpayers can reduce their income tax liability by properly claiming exemptions for themselves, their spouses, and their dependents. For 2011, taxpayers are allowed a $3,700 deduction for each personal exemption. Tax Rates Tax liability is either derived from the appropriate column of the Tax Tables or is computed from the appropriate line in the Tax Rate Schedules. The tax rate schedules include six tax brackets in 2011—10, 15, 25, 28, 33, and 35 percent.

Tax Credits and Prepayments Tax credits are applied against the income tax. The principal credits include the earned income credit, child tax credit, credit for the elderly, general business credit, dependent care credit, and foreign income tax credit. The tax liability is further reduced by the amounts withheld on income and by any estimated tax payments made during the year.

Net Tax Due or Refund The tax result after applying the credits and prepayments to the tax liability is the amount that must be paid to the Internal Revenue Service or the amount overpaid and to be refunded to the taxpayer.

Difference between Gross income and Taxable income

Gross income is commonly defined as the amount of a company's or a person's income before all deductions or any taxpayer’s income, except that which is specifically excluded by the Internal Revenue Code, before taking deductions or taxes into account. For a business, this amount is pre-tax net sales less cost of sales. Section 61 of the Internal Revenue Code (Code) defines "gross income" as "all income from whatever source derived."[1] Section 61(a) of the Code lists fifteen examples of items included in gross income; however, the list is not exhaustive.[2] Therefore, unless the Code specifies that something is excluded from gross income, the assumption is that it is included. Exceptions to what is included in gross income can be found under §§ 101-140 of the Code. Each of these sections excludes a particular type of inflow if it meets the criteria stated. For the purpose of a company's description of an employee's income, the term annual earnings may be used because a person may have other sources of taxable income in a year than what is earned from the employer. For instance, cashing out a Canadian Registered Retirement Savings Plan results in additional income that must be claimed as part of total world income. Taxable Income- The amount of income subject to income taxes; found by subtracting the appropriate deductions (IRA contributions, alimony payments, unreimbursed business expenses, some capital losses, etc.) from adjusted gross income.

Personal and Additional Exemptions

1. Personal exemption

For single individual or married individual judicially decreed as legally separated with no qualified dependents…………..……………..…P 50,000.00For head of family……………….………………………………..………P 50,000.00For each married individual ………………………………..……..……P 50,000.00

Note: In case of married individuals where only one of the spouses is deriving gross income, only such spouse will be allowed to claim the personal exemption.

2. Additional exemption.

For each qualified dependent, a P25, 000 additional exemption can be claimed but only up to 4 qualified dependents. The additional exemption can be claimed by the following:The husband who is deemed the head of the family unless he explicitly waives his right in favor of his wifeThe spouse who has custody of the child or children in case of legally separated spouses. Provided, that the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions allowed by the Tax Code.The individuals considered as Head of the Family supporting a qualified dependentNote: Dependent Child” means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.

REPUBLIC ACT No. 9504

An Act Amending Sections 22, 24, 34, 35, 51 and 79 of Republic Act No. 8424, as Amended, Otherwise Known as

the National Internal Revenue Code of 1987.

Section 1. Section 22 of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue Code of 1997, is hereby further amended by adding the following definition after Subsection (FF) to read as follows: “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 the Regional Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE).“(HH)” The term ‘minimum wage earner’ shall refer to a worker in the private sector paid the statutory minimum wage, or to an employee in the public sector with compensation income of not more than the statutory minimum wage 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 the National 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 the Philippines. – “(1) x x x“x x x; and“(c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources 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 in accordance 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 of Section 51(D) hereof, shall compute separately their individual income tax based on their respective total taxable income: Provided, That 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 spouses for the purpose of determining their respective taxable income.“Provided, That minimum wage earners as defined in Section 22(HH) of this Code shall be exempt from the payment of income tax on their taxable income: Provided, further, That the holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax. Sec. 3. Section 34 (L) of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue Code of 1997, is hereby amended to read as follows: “Sec. 34. Deductions from Gross Income. – Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under Section (M) hereof, in computing taxable income subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B) and (C); and 28(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 preceding Subsections, 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 his gross sales or gross receipts, as the case may be. In the case of a corporation subject to tax under Sections 27(A) and 28(A)(1), it may elect a standard deduction in an amount not exceeding forty percent (40%) of its gross income as defined in Section 32 of this Code. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall irrevocable for the taxable year for which the return is made. Provided, That an individual who is entitled to an claimed for the optional standard deduction shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits the said individual shall keep such records pertaining to this gross sales or gross receipts, or the said corporation shall keep such records pertaining to this gross income as defined in Section 32 of this Code during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner. Sec. 4. Section 35(A) and (B) of Republic Act No. 8424, as amended, otherwise known as the 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 this Title, there shall be allowed a basic personal exemption amounting to Fifty thousand pesos (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 additional exemption of Twenty-five thousand pesos (P25,000) for each dependent not exceeding four (4).

“The additional exemption for dependents shall be claimed by only one of the spouses in the case of married individuals.“In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children: Provided, That the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed. “For purposes of this Subsection, a ‘dependent’ means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.

Sec. 5. Section 51(A)(2) of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue Code of 1997, is hereby further amended to read as follows:“Sec. 51. Individual Return. – “(A) Requirements. – “(1) Except as provided in paragraph (2) of this Subsection, the following individuals 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 in Section 32(A)(1), derived from sources within the Philippines, the income tax on which has been correctly withheld under the provisions of Section 79 of this Code: Provided, That an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return:“(c) x x x; and“(d) A minimum wage earner as defined in Section 22(HH) of this Code or an individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special.

Sec. 6. Section 79(A) of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue Code of 1997, is hereby further amended to read as follows: “Sec. 79. Income Tax Collected at Source. – “(A) Requirement of Withholding. – Except in the case of a minimum wage earner as defined in Section 22(HH) of this Code, every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner. Sec. 7. Separability Clause. – If any provision of this Act is declared invalid or unconstitutional, other provisions hereof which are not affected thereby shall continue to be in full force and effect. Sec. 8. Repealing Clause. – Any law, presidential decree or issuance, executive order, letter of instruction, administrative order, rule or regulation contrary to or inconsistent with any provision of this Act is hereby amended or modified accordingly. Sec. 9. Effectivity Clause. – This Act shall take effect fifteen (15) days following its publication in the Official Gazette or in at least two (2) newspapers of general circulation.

How to Compute Income Tax in the Philippines (Single Proprietorship) Computing income tax expense and payable is different for individuals and corporations. Taxable corporations may be taxed using a fixed income tax rate. On the other hand, if you are a self-employed professional or an owner of a single proprietorship business, your income tax expense is computed using a graduated tax rate. It is a progressive tax which the tax rate increases as the taxable base amount increases. This means that the higher taxable income you have, the higher your income tax expense is.

Computation of Income Tax Due and Payable1. Compute your taxable Compensation Income (positive) or excess of Deductions over

Taxable Compensation Income (negative).

Here is how you will compute it: a. Determine your Gross Taxable Compensation Income. This is the income you earn from your employer during the taxable year. If you are earning purely from your business or you are not employed, then you can leave it blank.b. Determine your premium paid on Health and or Hospitalization, which should not exceed 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 will calculate 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 allowable deductions. Your allowable deductions can be either:

a) Optional Standard Deduction – an amount not exceeding 40% of the net sales for individuals and gross income for corporations; or

b) Itemized Deductions which include the following:ExpensesInterest

TaxesLosses

Bad DebtsDepreciation

Depletion of Oil and Gas Wells and MinesCharitable Contributions and Other Contributions

Research and DevelopmentPension Trusts

5. Compute you total taxable income by adding the result in #4 (Net Income) to the result in #1 (taxable Compensation Income or excess of Deductions over Taxable Compensation Income). If the result is negative or it becomes a loss, then you will not have a tax due for

the taxable year, otherwise, continue to the next step.

6. Compute your Income Tax Due. This is also your income tax expense incurred during the taxable 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 the end of the year. To calculate your income tax payable, deduct your income tax

due with the following tax credit/payments, if available.

8. Compute your Total Payable. If unfortunately, you fail to pay your income tax on or before the due date, the following penalties will be imposed and will be

added 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 or

before the due dates;b) Filing a return with a person or office other than those with whom it is

required to be filed;c) Failure to pay the full or part of the amount of tax shown on the return, or the

full amount of tax due for which no return is required to be filed, on or before the due date;

d) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of Assessment (Delinquency Surcharge).

Amount of Net Taxable Income Rate

Over But Not Over

P 10,000 5%

P 10,000 P 30,000 P 500 + 10% of the Excess over P 10,000

P 30,000 P 70,000 P 2,500 + 15% of the Excess over P 30,000

P 70,000 P 140,000 P 8,500 + 20% of the Excess over P 70,000

P 140,000 P 250,000 P 22,500 + 25% of the Excess over P 140,000

P 250,000 P 500,000 P 50,000 + 30% of the Excess over P 250,000

P 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 deficiency tax, in case any payment has been made on the basis of such

return before the discovery of the falsity or fraud, for each of the following violations:

a) Willful neglect to file the return within the period prescribed by the 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 such higher rate as may be prescribed by rules and regulations, on any unpaid amount of tax, from the date prescribed for the payment.

Thank you =)URL SOURCES:

http://businesstips.ph/how-to-compute-income-tax-in-the-philippines-single-proprietorship/

http://au.answers.yahoo.com/question/index?qid=20090427194052AADgJlh

http://businesstips.ph/what-are-deductions-and-exemptions-to-income-tax-philippines/

http://www.oakton.edu/user/1/jpadar/TAX/Week4/2012%20Basic%20Principles%20IM%20Ch03.pdf