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 2018-2022
Taxable income Tax due
P250,000 and below None (0%)
Above P250,000 to P400,000 20% of excess above P250,000
Above P400,000 to P800,000 P30,000 + 25% of excess over P400,000
Above P800,000 to P2,000,000 P130,000 + 30% of excess over P800,000
Above P2,000,000 to P8,000,000 P490,000 + 32% of excess over P2,000,000
Above P8,000,000 P2,410,000 + 35% of excess over P8,000,000

Year 2018-2022
Taxable income Tax due
P250,000 and below None (0%)
Above P250,000 to P400,000 15% of excess above P250,000
Above P400,000 to P800,000 P22,500 + 20% of excess over P400,000
Above P800,000 to P2,000,000 P102,500 + 25% of excess over P800,000
Above P2,000,000 to P8,000,000 P402,500 + 30% of excess over P2,000,000
Above P8,000,000 P2,205,500 + 35% of excess over P8,000,000

579
Repeal of the personal exemption
The TRAIN law repealed the concept or personal exemption in order to simplify the tax system.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 every 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 alien
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 or 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 mandatorily 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 correctly withheld
2. Tax credit - if the employee has other taxable income or if the tax is not correctly withheld

580
Employees with no other income
If the employee has no other taxable income, he may avail of the substituted filing 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 withheld).
4. The employee's spouse also complies with all 3 conditions stated above.
5. The employer files the annual information return (BIR Form No. 1604-CF).
6. The employer issues BIR Form No. 2316 to each employee.
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 has the
following income and withheld tax during the year:
Yousee Youbee
Taxable compensation income P 450,000 P 350,000
Withheld tax P 42,500 P 20,000
581
Mr. Estoque's 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) P 67,500
Illustration 2: Successive Employment
In 2020, Zeus resigned from Blue Moon Company and transferred employment to Gagamba
Company. The following were his income:
Blue Moon Gagamba
Taxable compensation income P 300,000 P 400,000
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) P 700,000
Income tax due, per individual tax table P 105,000
Less: Tax withheld by both employers 40,000
Income tax payable or (refundable) P 65,000
Illustration 3: Employer error
In 2020, Jeff s employer withheld a total of P 56,000 out of his P460,000 taxable compensation
income.
Since the tax withheld is erroneous, Jeff shall file an annual adjustment return and pay residual
tax due or claim refund or tax credit for excess withholding, as follows:
Taxable compensation income P 460,000
Income tax due, per individual tax table P 45,000
Less: Tax withheld by employers ( 56,000)
Income tax payable or (refundable) (P 11,000)
Jeff shall use BIR 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

582
If the employee has other taxable income, the employee is mandatorily required to file an annual
income tax return to incorporate other income sources in his return. This is 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 is a sales executive. He received the following compensation and benefits from his
employer:
Gross compensation income P 987,000
Exempt benefits 84,000
Fringe benefits (paid personal vacation) 81,000
Mandatory deduction for SSS, PhilHealth, 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 20% withholding tax P 72,000
Interest income from bank deposits, net of 20% 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%) P 90,000
Gain on sale of arts collection (P124,000 x 50% - long term) 62,000
Other income P 152,000
Note: The fringe benefits of an executive - a 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 final taxes are not-
creditable.

The tax credits shall be:

Withholding tax on compensation (Form 2316) P 145,750
Withholding tax on the interest (P90K x 20% under Form 2307) 18,000

583
Mr. Milo's taxable income shall he computed as:
Gross compensation income P 907,000
Less: Mandatory deductions P 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 P 1,015,000
Mr. Milo's income tax still due shall be computed as:
Income tax due P 194,500
Less: Tax credit
Form 2316 P 145,750
Form 2307 18,000 163,750
Income tax still due P 30,750

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 1701Q) and an annual tax return:
Quarterly Tax Returns Deadline
1st Quarter ITR – 0701Q May 15 of the same calendar year
2nd Quarter ITR – 0701Q August 15 of the same calendar year
3rd Quarter ITR – 0701Q November 15 of the same calendar year
Annual ITR – 0701A 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 – June July - Sept. Oct – Dec.
Gross receipts P500,000 P520,000 P550,000 P580,000
Less: Cost of services 120,000 200,000 250,000 270,000
Gross income P380,000 P320,000 P300,000 P310,000
Less: Expenses
- Business expenses P100,000 P130,000 P120,000 P140,000
- Personal expenses 60,000 63,000 58,000 85,000
Total P160,000 P193,000 P178,000 P225,000
Net income P220,000 P127,000 P122,000 P 85,000
584
 Jan. - March April – June July - Sept. Oct – Dec.
Withholding tax P 4,000 P 10,000 P 15,000 P 14,000
His quarterly 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 P500,000 P1,020,000 P1,570,000 P2,150,000
Less: Cost of sales 120,000 320,000 570,000 840,000
Gross income P380,000 P 700,000 P1,000,000 P1,310,000
Less: Deductions 100,000 230,000 350,000 490,000
Taxable net income P280,000 P 470,000 P 650,000 P 820,000

Income tax due P 6,000 P 47,500 P 92,500 P 136,000

Less: Tax credits
-CWT this quarter P 4,000 P 10,000 P 15,000 P 14,000
-CWT prior quarters 0 4,000 14,000 29,000
Total credits P 4,000 P 14,000 P 29,000 P 43,000
P 2,000 P 33,500 P 63,500 P 93,000
Less: Estimated tax paid
in prior quarters 0 2,000 33,500 63,500
Income tax still due P 2,000 P 31,500 P 30,000 P 29,500
Illustration 2 - Optional standard deduction
Let us assume the same data in the preceding problem, except that the taxpayer opted to 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 ITR

Gross receipts P500,000 P1,020,000 P1,570,000 P2,150,000
Less: OSD - 40% 200,000 408,000 628,000 860,000
Taxable net income P300,000 P 612,000 P 942,000 P1,290,000

Income tax due P 10,000 P 83,000 P 172,600 P 277,000

Less: Tax credits
-CWT this quarter P 4,000 P 10,000 P 15,000 P 14,000
-CWT prior quarters 0 4,000 14,000 29,000
Total credits P 4,000 P 14,000 P 29,000 P 43,000
P 6,000 P 69,000 P 143,600 P 234,000
Less: Estimated tax paid
in prior quarters 0 6,000 69,000 143,600
Income tax still due P 6,000 P 63,000 P 74,600 P 90,400
585
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 indicated in the annual adjustment return. Once the option to carry-
over 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 1701Q. 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 P 150,000 P 160,000 P 165,000 P 180,000
Withholding tax on compensation (Form 2316) - 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 P 170,000
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
Jan. - March April – June July - Sept. Annual ITR
Quarterly income tax due 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:

586
Taxable compensation income P 987,000
Gross income P 1,310,000
Less: Deductions 490,000
Net income P 820,000
Taxable income P 1,807,000
Mrs. Macipag shall file BIR Form 1701 for her consolidated income. Her annual income tax still
due shall be computed as:
Income tax due P 432,100
Less: Tax credit
WH tax on compensation (Form 2316) P 93,750
Expanded withholding tax (Form 2307s) 43,000
Estimated tax payments (Form 1701Qs) 63,500 200,250
Income tax still due P 231,850
THE 8% INCOME TAX OPTION
The TRAIN law 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 also required
to pay a business tax which is either a 3% percentage tax or a 12% value added tax (VAT).

587
Types of business taxpayers:
1. Exempt businesses - not subject to VAT or percentage tax
Examples:
a. Business selling agricultural products in original state
b. Agricultural contract growers
c. Book publishers or bookstores
2. Business specifically subject to other percentage taxes - not subject to VAT 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. 12% value added tax - if their annual sales exceed P3,000,000 or when they 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 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 partnership
b. Co-owners receiving share of income in co-owned properties
c. Venturers receiving share in net income of an exempt joint venture
d. Heirs or beneficiaries of trust receiving income distribution from estates or trusts
588
Tax obligations of individual non-VAT taxpayers:
Regular tax option 8% Income tax option
Regular income tax 3 quarterly 1701Qs and 1 3 quarterly 1701Qs and 1
annual 1701 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 tax 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 embedded in the tax table,
there will be no more P250,000 deduction allowable
589
against the basis of the 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 8% income tax option shall be computed as:
Income Tax due
Taxable compensation income P 920,000
Less: Lower tax bracket in tax table 800,000 P 130,000
Residual income P 120,000
Multiply by: Incremental tax rate 30% 36,000
Income tax due on compensation income P 166,000
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 334,000
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 P 150,000
Less: Lower tax bracket in tax table 250,000 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 P 100,000 excess of P250,000 over the compensation income cannot be deducted against the basis of
the 8%. No deduction cross-over is allowed.

590
INTEGRATED ILLUSTRATION
Integrated Illustration 1 - Pure business or professional income earner
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 1,382,000
Add: Other income
Dividend income P 12,000
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 P 952,000

Regular Tax Option

The 2020 taxable net income of Mr. Cardenas shall be computed as follows:
Net Sales/ Revenues/Receipts/Fees (P2,382,000 + 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 1,400,000
Add: Non-operating income subject to regular tax
Gain on sale of machinery P 40,000
Gain on sale of bonds (P20Kx 50% - long-term) 10,000
Interest income from bonds 14,000 64,000
Total Gross Income P 1,464,000
Less: Allowable deductions (Business expenses) 600,000
Taxable net income P 864,000

Under the regular tax option, he would pay the following for 2020:
a. Regular income tax:
Taxable net income P 864,000
Less: Lower limit of the income bracket
where the taxable income qualifies 800,000 P 130,000
Excess P 64,000
Multiply by: bracket marginal rate 30% 19,200
Income tax due P 149,200

591
b. 3% business tax:
Net Sales/ Revenues/Receipts/ Fees P 2,600,000
Multiply by: Percentage tax rate 3%
Total percentage tax due P 78,000
Total taxes under the regular tax option P 227,200
The regular income tax would be paid in three quarterly tax filing (1701Q) and an annual
income tax return (1701). The 3% percentage tax will be paid in four quarterly percentage
tax returns (2551Q).
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 P 40,000
Gain on sale of bonds (P20K x 50% - 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 not always the case.
At the start of the year wherein the option is made, you could not tell for sure which option would
yield the lesser tax, except only if you have accurate information 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
Regular Tax Option
Under the regular tax option, he would pay the following for 2020:
a. Regular income tax:
Taxable compensation income P 1,200,000
Taxable net income 864,000
Taxable income P 2,064,000
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

592
b. 3% business tax:
Net Sales/ Revenues/Receipts/ Fees P 2,600,000
Multiply by: Percentage tax rate 3%
Total percentage tax due P 78,000
Total taxes under the regular tax option P 588,480
The 8% Income Tax Option
Under the 8% income tax option, he would pay the following:
a. Regular income tax:
Taxable compensation income P 1,200,000
Less: Lower limit of the income bracket
where the taxable income qualifies 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. 3% business tax:
Net Sales/Revenues/Receipts/Fees P 2,600,000
Add: Other income subject to regular tax
Gain on sale of machinery 40,000
Gain on sale of bonds 10,000
Interest income from bonds 14,000
Total P 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 are mandatorily required to change
registration from non-VAT to a VAT taxpayer before the end of the 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 payments shall
be considered as tax credit against the regular income tax due. The taxpayer shall be required to
pay the 3% percentage tax for sales or receipts generated before becoming a VAT taxpayer.
Illustration
Mr. Quito, a pure business income earner, opted to the 8% income tax in the first quarter of 2020.
In June of 2020, he exceeded the P3M VAT threshold.

593
 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 P 600,000 P 1,000,000 P 500,000
Gain on sale of domestic stocks 20,000 30,000
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 P 1,200,000
Less: 250,000
Total 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 P 1,600,000
Other income subject to regular tax 40,000
Total income subject to regular tax P 1,640,000
Less:
Deductions (business expenses) P 770,000
Percentage tax expense 96,000 P 866,000
Taxable income P 774,000

594
The 2nd quarter income tax due of Mr. Quito shall be computed as:
Income Tax due
Taxable income P 774,000
Less: Lower tax bracket 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.
3rd Quarter (July to September)
Sales P 4,200,000
Less: Cost of sales 2,100,000
Gross 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 P 1,166,000
Taxable income P 974,000
The 3rd quarter income tax due of Mr. Quito shall be computed as:
Income Tax due
Taxable 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
TAXABLE ESTATES AND TRUSTS
Taxable Estates
An estate is an income taxpayer if under judicial settlement or administration. An estate under
extra-judicial settlement is not a taxpayer. The income of the state under extra-judicial settlement
is taxable to the heirs.
Taxable Trusts
A revocable trust is not a taxpayer and is treated as a pass-through entity whose 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 had the following
income in 2019:
Compensation income P 320,000
Rental income 960,000
Total P 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 registered as an individual taxpayer.
596
Thus, the following income shall be reported to the income tax return of the:
Estate of the
Decedent decedent
Compensation income P 320,000 -
Rental income (6.5 months x P 80,000) 520,000 -
Rental income (5.5 months x P 80,000) P 440,000
Taxable income P 840,000 P 440,000
Note:
1. January 1 to July 15, 2019 is 6.5 months while July 16 to December 31 is 5.5 months.
2. Cut-off 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 estate 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. Barbel 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 P 200,000
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 heirs 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.
The taxable income of the trust shall be computed as follows:
Gross income P 720,000
Less: Regular allowable deductions P 250,000
Special allowable deduction
Income distribution to beneficiaries 100,000 350,000
Taxable net income P 370,000
597
Note: Robin will report the P100,000 income distribution in his 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 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 which the grantor
may derive by deliberately splitting the corpus of the 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 P 400,000 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 Trust 2
Operating income P 400,000 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 P 22,000 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 P 360,000 P 540,000 P 900,000
Income tax due P 160,000
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
598
Trust 3 is not taxable as it is revocable. The entire P400,000 income of Trust 3 including the
P80,000 income distribution to Cindy will be included in the taxable income of Don Ambrocio.
Illustration 2: Trusts with retention of certain rights
Mr. Masagana designated two trusts as follows:
Trust Beneficiary Designation
Trust 1 Cassandra Irrevocable as to corpus and income, however, Mr. Masagana
(daughter) reserves the power to revest to himself ¼ of the corpus upon
the happening of same specified contingencies.
Trust 2 Alexander Irrevocable as to corpus and income except that P30,000 of the
(son) annual income will be used to pay the life insurance premium
of Mr. 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 P 100,000, 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 taxable income of the grantor.
The taxable income of Trust 1 and Trust 2 shall be computed as follows:
Trust 1 Trust 2
Operating income P 200,000 P 300,000
Less: Special regular itemized deduction
Income pertaining to grantor *50,000 30,000
Distribution to beneficiaries 50,000 100,000
Taxable income P 100,000 P 170,000
Note:
1. The grantor has reserved power to revoke one quarter of the corpus in Trust 1.
2. The P50,000 income pertaining to such part, computed as (P200,000 x 1/4), shall be taxable upon the
grantor.
3. The P30,000 income which shall be reserved for the payment of the life insurance of the grantor shall be
likewise taxable 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), NIRC) It 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
liabilities 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 distributee 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 distributee.
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 spouces
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.
Cruz 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 2307s P 140,000
Payments under 1701Qs 340,000
Form 2316s P 250,000
Total P 480,000 P 250,000
The income tax and still due from the spouses shall be reported as follows:
Mr. Cruz Mrs. Cruz
N et Sales/Revenues/Receipts/Fees P 2,800,000
Add: Other taxable income from operation 0
Total sales/revenues/receipts/fees P 2,800,000
Less: Cost of sales or services 900,000
Gross Income from business/profession P 2,700,000 P 0
Add: Non-operating income (rental income) 700,000 700,000
Total Gross income P 3,400,000 P 700,000
600
 Mr. Cruz Mrs. Cruz
Total Gross income P 3,400,000 P 700,000
Less: Allowable deductions 600,000 -
Net income P 2,800,000 P 700,000
Compensation income P 0 P 1,200,000
Taxable income P 2,800,000 P 1,900,000
Income tax due P 746,000 P 460,000
Less: Tax credit 480,000 250,000
Tax still due P 266,000 P 110,000
Aggregate amount payable P 376,000

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 & HDMF P 500,000 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
Gross compensation, net mandatory deductions P 500,000 P 420,000
Less: Exempt Qualified PERA contribution 100,000 80,000
Taxable compensation income P 400,000 P 340,000
Income tax due, per tax table P 30,000 P 18,000
Less: Tax credits
CWT on compensation P 23,000 P 13,000
5% on Qualified PERA contribution 5,000 4,000
Total tax credits P 28,000 P 17,000
Tax still due and payable P 2,000 P 1,000
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 his 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 facie 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 regulations. This is mandatory and shall be filed 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 of each year
covering the income for the preceding year with:
a. Any authorized agent banks (AAB) located within the jurisdiction of the Revenue
District Officer (RDO) where the taxpayer is registered
b. Revenue Collection Officer (RCO) under the jurisdiction of the RDO where 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 tax payable such as those with negative
or zero taxable income, those with exempt or no operation during

602
the period, those with tax creditable or refundable, or those with balance payable only on the
second installment.
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.
INSTALLMENT 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) P 5,000
Less:
Creditable withholding taxes P 2,000
Quarterly estimated tax payments 2,400 4,400
Tax payable P 600
The second installment which shall be due on or before October 15, 2020 shall be:
Tax due on first installment (P10,000/2) P 5,000
Illustration 2
An individual taxpayer availing of the installment payment of his 2019 income tax had a 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
Less: Creditable withholding tax 4,000
Tax payable (P 500)
603
The second installment due on or before October 15, 2020 shall be:
Tax due on first installment (P7,000/2) P 3,500
Less: Excess withholding tax in first installment ( 500)
Tax payable P 3,000
Illustration 3 - Late payment
Assume the same facts in the preceding illustration, except that the second installment 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% x P3,000) 750
Interest (12% x 61/365 x P3,000) 60
Total amount due P 3,810
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

604
AMENDMENT 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