INCOME TAX ON INDIVIDUALS

Classification of Income
1. Compensation Income
2. Business or Professional Income
3. Passive Income
4. Capital gains from sale or shares of stock of a domestic corporation not listed and traded
thru a local stock exchange, held as capital asset
5. Capital gains from sale of Real Property in the Philippines held as capital asset
6. Fringe benefits

BIR Forms for FWT

Capital Gains Tax

Classification of Taxpayer’s Properties

1. Ordinary Assets – assets used in business

 Basically, ordinary assets are:
a) Asset held for sale
b) Assets held for use
2. Capital Assets – any asset other than ordinary asset
 Basically, capital assets are:
a) Personal assets
b) Business assets of any taxpayer which are:
i. Financial Assets
ii. Intangible Assets

Types of Gains on Dealing in Properties

 Capital Gains Subject to CGT

 Sales of shares of stock of a Domestic Corporation not listed and traded through a local
stock exchange
 Sale of real properties classified as capital asset located in the Philippines

Sales of shares of stock of a Domestic Corporation not listed and traded through a local stock
exchange

a. It applies to all taxpayers disposing stocks classified as capital assets regardless of classification
of the taxpayer.
b. Tax base: Net capital gain, which is the excess of the selling price/fair market value (less cost to
sell) over the cost of the shares
c. Capital gain tax rate: 15%

Selling Price……….. Pxx

Less: Cost…………….(xx)

Capital Gain………… xx

Rate……………………. 15%

Capital gain tax…… xx

Illustration: CGT DOMESTIC STOCKS

Ramon sold 2,000 shares of a domestic corporation directly to a buyer (Benigno) at P350 per share. The
shares were acquired six (6) months ago at P210 per share. How much is the capital gains tax?

Ramon sold 2,000 shares of a domestic corporation directly to a buyer (Benigno) at P200 per share. The
share were acquired two (2) years ago at P210 per share. How much is the capital gains tax?

Tax Free Exchanges

 Corporate Reorganization
 No gain or loss shall be recognized on a corporation or on its stocks or securities if such
corporation is a party to a reorganization and exchanges property in pursuance of a plan of
reorganization solely for stocks or securities in another corporation that is a party to the
reorganization.
 Initial Acquisition of Control
No gain or loss shall be recognized if property is transferred to a corporation by a person in
exchange for the stocks or units of participation in such a corporation of which as a result of
such exchange, said person, alone or together with others not exceeding four, gains control of
said corporation.

Sale, Exchange, and Other Disposition of Real Property Classified as Capital Asset Located in the
Philippines

 Tax base: Selling price of fair market value (FMV) whichever is higher. FMV of real property shall
be higher between:
i. Fair market value as provided by City or Provincial assessors (also known as assessed
value or FMV for real property tax declaration purposes); and
ii. Zonal value as provided by the commissioner of Internal Revenue (CIR)
 The 6% CGT applies even if the sale transaction resulted to a loss
 Applies even if the sale is involuntary
 Capital gain tac rate: 6%

Selling Price or FMV whichever is higher…….. Pxx

Rate…………………………………………………………….. 6%

Capital gain tax……………………………………………. xx

Illustration: 6% CGT

On December 1, 2021, Ms. Batangas sold for P4,000,000 an unused lot with a cost and fair value of
P2,000,000 and P5,000,000, respectively.

Compute the CGT

Sale of Real Property to the Government

If a real property classified as capital asset located in the Philippines is sold to the government or any of
its political subdivisions or agencies or to government owned or controlled corporations (GOCCS), the
individual taxpayer shall have the option to be taxed at 6% CGT or regular income tax using the
graduated tax rate.

Exemption to the 6% CGT Under the NIRC

 The sale, exchange and other disposition of a principal residence for the re-acquisition of a new
principal residence by individual taxpayers is exempt from 6% CGT.
 Requisites:
 1. The seller must be a citizen or resident alien
2. The sale involves the principal residence of the seller-taxpayer
3. The proceeds of the sale is utilized in acquiring a new principal residence.
4. The BIR is duly notified by the taxpayer of his intention to avail of the tax exemption within
30 days of the sale through a prescribed return (BIR Form 1706) and Sworn Declaration of
Intent.
5. The reacquisition of the new resident must be within 18 months from the date of the sale.
6. The capital gain is held in escrow in favor of the government.
7. The exemption can only be availed of once in every 10 years.
8. The historical cost or adjusted basis of the principal residence sold shall be carried over to
the new principal residence built or acquired.

Payment of CGT in Installment

Domestic Stocks:

a. Selling Price exceeds P1,000

b. Initial Payment does not exceed 25% of Selling Price

Real Property:

a. Initial Payment does not exceed 25% of Selling Price

ILLUSTRATION: INSTALLMENT PAYMENT

On November 1, 20221, Mr. Batanes made a sale of domestic stocks costing P700,000 directly to a buyer
for P1,000,000. The buyer agreed to pay in P100,000 monthly installments starting November 30.

Required:

a) Compute the CGT payable for every installment

b) Compute the CGT payable for every installment if the stocks is preciously mortgaged for 600,000
c) Compute the CGT payable for every installment if the stocks is previously mortgaged for 750,000

ILLUSTRATION: INSTALLMENT PAYMENT

On December 1, 2021, Ms. Batangas sold for P4,000,000 an unused lot with a cost and fair value of
P2,000,000 and 5,000,000, respectively. The buyer agreed to pay P500,000 monthly installments starting
December 31, 2021.

Required:

a) Compute the CGT payable for every installment

b) Compute the CGT payable for every installment if the land is previously mortgaged for 1,000,000
c) Compute the CGT payable for every installment if the stocks is previously mortgaged for
2,500,000
 Scope of CGT

BIR Forms for CGT

 Compensation Income

All remuneration received for services performed by an employee for his employer under an employee-
employer relationship.

Employer – refers to any person for whom an individual performs any service of whatever nature as
employee of such person.

Employee – refers to any individual who is recipient of wages and includes officer, employee or elected
official of the Government of the Philippines or any political subdivisions, agency or instrumentality.

Elements of Employer-Employee Relationship

 Selection and engagement of employees

 Payment of wages
 Power of dismissal
 Power of control

Types of Employee as to Taxability

1. Minimum wage earners

2. Regular employees

TAX MODEL ON COMPENSATION INCOME

Pure Compensation Income

Gross compensation income P xx

Less: Non-taxable compensation income* (xx)
Taxable income xx
Multiply by tax rate (annual tac table 0% - 35%) %
Income tax due xx
Less: Withholding tax on compensation (per BIR From 2316) (xx)

Income tax payable xx

Gross Compensation Income

 Includes all remuneration received under an employer-employee relationship

 Composition of taxable compensation income:
1. Regular compensation
2. Supplemental compensation
Non-Taxable Compensation

A. Mandatory Deductions
1. GSIS
2. SSS
3. PhilHealth
4. HDMF
5. Union Dues
B. 13th month pay and other benefits not exceeding P90,000
C. Benefits received from or enjoyed under the SSS in accordance with the provisions of Republic
Act. No. 8282. Benefits received from the GSIS under Republic Act No. 8291, including
retirements gratuity received by government officials and employees.
D. Benefits necessary to the trade, business, or conduct of profession of the employer
E. Benefits for the convenience or advantage of the employer
F. De Minimis Benefits
1. Monetized unused vacation leave credits of private employees not exceeding ten (10) days
during the year;
2. Monetized value of vacation and sick leave credits paid to government officials and
employees;
3. Medical cash allowance to dependents of employee, not exceeding P1,500 per employee
per semester or P250 per month;
4. Rice subsidy of P2,000 or one (1) sack of 50 kg. rice per month amounting to not more than
P2,000;
5. Uniform and clothing allowance not exceeding P6,000 per annum;
6. Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs,
annual medical/executive check-up, maternity assistance, and routine consultations, noyt
exceeding P10,000 per annum;
7. Laundry allowance not exceeding P300 per month;
8. Employees achievement awards, e.g., for length of service or safety achievement, which
must be in the ofrm of a tangible personal property other than cash or gift certificate, with
an annual monetary value not exceeding P10,000 received by the employee under an
establish written plan which does not discriminate in favor of highly paid employees;
9. Gifts given during Christmas and major anniversary celebration not exceeding P5,000 per
employee per annum;
10. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the
basic minimum wage on a per region basis;
11. Benefits by an employee by virtue of a collective bargaining agreement (CBA) and
productivity incentive schemes provided that the total monetary value received from both
CBA and productivity incentive schemes combined do not exceed P10,000 per employee per
taxable year.

Taxable De Minimis

 Excess de minimis over their regulatory limit

 Other benefits of relatively small value that are not included in the list of de minimis benefits.

Treatment of Taxabale De Minimis Benefits

 For rank-and-file employees

 The excess is added to the 13th month pay and other benefits if the total of the computation
is greater than P90,000, it becomes taxable as part of the employee’s gross income.
 For managerial and supervisory employees
Taxable de minimis is treated as fringe benefit subject to final fringe benefit tax

ILLUSTRATION 1: DE MINIMIS LIMIT

Alexander, a private employee who is paid a P600 daily rate, receives the following benefits during the
year 2022:

Monetized unused vacation leave credits 9 days

Monetized unused sick leave credits 9 days
Medical assistance Php 7,000
Rice subsidy Php 30,000
Clothing allowance Php 9,000
Laundry allowance Php 6,000

Required: Determine the amount to be included in other benefits.

ILLUSTRATION 2: DE MINIMIS LIMIT

Giovanni, a government rank and file employee, received the following benefits

Monetized unused vacation leave credits (10 days) 6,000

Monetized unused sick leave credits (15 days) 9,000
Uniform allowance 5,000
Laundry allowance 4,800

Required: Determine the amount to be included in other benefits

MULTIPLY BY TAX RATE (ANNUAL TAX TABLE 0% - 35%)

 MINIMUM WAGE EARNER

MWE are exempt from income tax on the following:

1. Basic minimum wage

2. Other Benefits (HHON)
a. Holiday pay
b. Hazard pay
c. Overtime pay
d. Night shift differential pay
ILLUSTRATION 1

Bella, married with two minor children has the following data during the calendar year:

Gross salaries P600,000

Overtime pay 9,000
Night shift differential pay 2,700
Payroll deductions:
SSS contribution 6,975
Philhealth contribution 5,250
Pag-ibig contribution 1,200
Labor union dues 1,500
Advances from employer 12,000
Thirteenth month pay 50,000
Productivity incentive pay 45,000
Rice subsidy 27,000
Withholding tax on compensation 75,000

Required:

1. Compute the income tax payable of Bella.

2. Compute the total non-taxable/exempt compensation income of Bella.

BUSINESS OR PROFESSIONAL INCOME

Those earning business income or income from the practice of profession, the individual is allowed to
claim itemized deductions or the optional standard deduction (OSD). If they earn income purely from
business or practice of profession, if they use the graduated rates the basis of which is taxable income

BUSINESS OR PROFESSIONAL INCOME AVAILING OF THE GRADUATED RATES

Gross sales/receipts from business/profession P xx

Less: Cost and allowable deductions (itemized or (xx)
OSD)
Taxable income xx
Multiply by tax rate (annual tax table 0% - 35%) %
Income tax due xx
Less: Withholding tax (per BIR From 2307) (xx)
Income tax payable xx
PURE BUSINESS OR PROFESSIONAL INCOME AVAILING OF THE 8% INCOME TAX

Gross sales/receipts P xx
Add: Non-operating income (xx)
Gross taxable income xx
Less: Amount allowed as deduction under Sec. 24 (A)(2)(b) or NIRC (250,000)
Net taxable income xx
Multiply by tax rate 8%
Income tax due xx
Less: Withholding tax (per BIR From 2307) (xx)
Income tax payable xx

ILLUSTRATION 2

PURE BUSINESS INCOME – GRADUATED TAX RATES

Ms. Bantog operates a convenience store while she offers bookkeeping services to her clients. During
the calendar year her gross amounted to P800,000, in addition to her receipts from bookkeeping
services of P300,000. She incurred cost of sales and operating expenses amounting to P600,000 and
P200,000 respectively. She failed to signify her intention to be taxed at 8% income tax rate in her 1st
quarter return.

Required: Compute the income tax of Ms. Bantog.

ILLUSTRATION 3

PURE BUSINESS INCOME – 8% INCOME TAX RATE

Ms. Bantog operates a convenience store while she offers bookkeeping services to her clients. During
the calendar year her gross sales amounted to P800,000, in addition to her receipts from bookkeeping
services of P300,000. She incurred cost of sales and operating expenses amounting to P600,000 and
P200,000 respectively. She already signed her intention to be taxed at 8% income tax rate in her 1 st
quarter return.

Required: Compute the income tax of Ms. Bantog.

ILLUSTRATION 4

PURE BUSINESS INCOME – GROSS RECEIPTS EXCEEDED THE VAT THRESHOLD

Mr. Ray is a prominent independent contractor who offers architectural and engineering services. Since
his career flourished, his total gross receipts amounted to P4,250,000 for the taxable year. Hbis
recorded cost of service and operating expense was P2,150,000 and P1,000,000 resectively.

Required: Compute the income tax of Mr. Ray.

 MIXED INCOME EARNERS

On Compensation Income

Gross compensation income P xx

Less: No-taxable compensation income (xx)

Taxable income xx
Multiply by tax rate (annual tax table 0% - 35%) %

Income tax due xx

On business or professional income availing of the 8% income tax

Gross sale/receipts P xx
Add: Non-operating income (xx)
Gross taxable income xx
Multiply by tax rate 8%
Income tax due xx

Total Income Tax Due (Compensation + Business) P xx

Less: Withholding tax (per BIR From 2316/2307) (xx)

Income tax payable xx

ILLUSTRATION 5

MIX INCOME – 8% INCOME TAX RATE

Ms. Gan, a Financial Comptroller of BASS Company, earned annual compensation during the calendar
year of P1,500,000 inclusive of 13th month and other benefits in the amount of P120,000 but net of
mandatory contributions to SSS and Philhealth. Aside from employment income, she owns a
convenience store, with gross sales of P2,400,000. Her cost of sales and operating expenses are
P1,000,000 and P600,000, respectively, and with non-operating income of P100,000.

Required: Compute the income tax payable of Ms. Gan if she opted to be taxed 8%

ILLUSTRATION 6

MIX INCOME – GRADUATED TAX RATE

Ms. Gan, a Financial Comptroller of BASS Company, earned annual compensation during the calendar
year of P1,500,000 inclusive of 13th month and other benefits in the amount of P120,000 but net of
mandatory contributions to SSS and Philhealth. Aside from employment income, she owns a
convenience store, with gross sales of P2,400,000. Her cost of sales and operating expenses are
P1,000,000 and P600,000, respectively, and with non-operating income of P100,000.

Required: Compute the income tax payable of Ms. Gan if she not opt for the 8%
 INCOME TAX RETURNS

MARRIED INDIVIDUALS

 A husband and wife must file one consolidated income tax return
 Income that cannot be definitely attributed or identified as exclusive income of either spous
is divided equally between them.

ALLOWABLE DEDUCTIONS FROM INCOME OF INDIVIDUAL TAXPAYERS

 Compensation income – no deductions are allowed

 Business/professional – either itemized deductions or optional standard deduction

OPTIONAL STANDARD DEDUCTION (OSD)

In lieu of itemized deductions, an individual taxpayer (except a nonresident alien) may elect a standard
deduction in an amount not exceeding forty percent (40%) of his gross or receipts, as the case may be.

The following conditions must be satisfied:

1. That he signified his intention to elect optional standard deduction by checking the appropriate
box in the income tax return filed for the first quarter or the initial quarter of the taxable year
after the commencement of new business/practice of profession.
 2. Once the election is made, it must be consistently applied to all the succeeding quarterly returns
and in the final income tax return for the taxable year.

ILLUSTRATION 8

Jeremiah, a resident citizen of the Philippines had the following income and expenses in 2022:

Income:
Salary from TLC Company P210,000

Gross receipts from business 1,100,000

Cost of sales 450,000
Expenses:
Salaries of employees 500,000
Rent of office space 24,000
Depreciation of the office and store equipment 30,000
Taxes and licenses 10,000
Bad debts 7,500
Light and water 18,000

Required: Compute the income tax due per ITR assuming Jeremiah availed of:

1. Itemized deduction
2. Optional standard deduction

COMPREHENSIVE ILLUSTRATION

ILLUSTRATION 7

A resident citizen of the Philippines had the following non-cumulative data in 2022.

1st Q 2nd Q 3rd Q 4th Q

Gross sales P1,200,000 P900,000 P900,000 P700,000
Cost of goods sold 700,000 500,000 600,000 400,000
Business expense 200,000 125,000 225,000 150,000
Interest income – Landbank 800 400 400 200
Capital gain sale of land 300,000
Selling Price P900,000
Cost: P600,000
Assessor’s FMV P800,000

Required:

3. Compute the income tax payable per ITR for the year and each quarter
4. Compute the final tax on passive income
5. Compute the capital gain tax