CHAPTER 03: Deductions from Gross Estate

Classifications of Deductions from Gross 2. Indebtedness or Claims against the Estate

Estate
 Claims - debts or demands of a pecuniary
1. Ordinary deductions nature which could have been enforced
2. Special deductions against the deceased in his lifetime and
3. Share of the surviving spouse, if the decedent is could have been reduced to simple money
married judgments
Claims against the estate (CAE) or indebtedness in
respect of property may arise out of the following
sources:
 Contract
 Tort
 Operation of Law
Requisites for Deductibility (RR 12-2018)
a. The liability represents personal obligation of the
deceased existing at the time of his death;
I. Ordinary Deductions b. The liability was contracted in good faith and for
adequate and full consideration in money or
A. LITe (Losses, Indebtedness, Taxes, etc.) money's worth;
1. Losses c. The liability must be a debt or claim which is
Deductible losses from the gross estate valid in law and enforceable in court;
 "casualty losses" d. The debt must not have been condoned by the
 The amount deductible is the value of the creditor or the action to collect from the decedent
property lost. must not have been prescribed.

Requisites for Deductibility Substantiation Requirements

a. Arising exclusively from: GEN RULE: All unpaid obligations and liabilities of
the decedent at the time of his death are allowed as
 acts of God such as fire, storm, shipwreck deduction from gross estate.
and other similar casualty
 acts of man such as robbery, theft, Provided, however, that the following
embezzlement requirements/documents are complied
with/submitted:
b. Not compensated by insurance or otherwise.
1. In case of simple loan (including advances)
c. Not claimed as a deduction in an income tax
return of the estate subject to income tax (refer to a. debt instrument: notarized
Illustration #1, Case B). loans granted by financial institutions: not
d. Incurred during the settlement period of the notarized
estate. b. unpaid balance of the debt with interest:
 Settlement period - the period prescribed notarized Certification from the creditor
by law to file and pay the estate tax, which  creditor - corporation: certified by the
is, under the TRAIN Law, within one (1) principal officers of the corporation
year from the date of death.

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  creditor – partnership: certified by any of the  creditor - bank or other financial institutions:
general partners certified by the branch manager of the
 creditor - bank or other financial institutions: bank/financial institution
certified by the branch manager of the  creditor - individual: certified by him
bank/financial institution
RULE: In any of these cases, the one who should
 creditor - individual: certified by him
certify must not be a relative of the borrower within
RULE: In any of these cases, the one who should the fourth civil degree, either by consanguinity or
certify must not be a relative of the borrower within affinity.
the fourth civil degree, either by consanguinity or
EXPN: When the lender is a relative of the debtor
affinity.
in the degree mentioned above, a copy of the
EXPN: When the lender is a relative of the debtor promissory note or other evidence of indebtedness
in the degree mentioned above, a copy of the must be filed with RDO having jurisdiction over the
promissory note or other evidence of indebtedness borrower within fifteen days from execution thereof.
must be filed with RDO having jurisdiction over the
c. The creditor must provide a certified copy of its
borrower within fifteen days from execution thereof.
latest audited balance sheet and subsidiary
c. The creditor must provide proof of financial ledgers, along with a detailed schedule of unpaid
capacity and a recent audited balance sheet with a debts for the decedent-debtor.
detailed schedule of unpaid balances as per
d. In a testate or intestate court settlement, the
internal revenue issuance requirements.
court must file relevant documents, approve claims
If the creditor is no longer required to file an against the estate, and include any existing court
income tax return, they must provide a notarized orders.
declaration of their loan capacity.
Funeral, Medical, and Judicial Expenses
Non-resident creditors must submit a notarized
Beginning January 1, 2018 or upon effectivity of the
declaration of their capacity to lend, authenticated
TRAIN Law, the following expenses are NO
by the tax authority of the country where the loan
LONGER ALLOWED as deduction from the gross
was granted.
estate of a decedent:
d. A statement under oath from the estate
 Funeral expenses
administrator or executor indicating the loan's
 Medical expenses
disposition within three years of the decedent's
 Judicial expenses
death.
Unpaid Mortgages or Indebtedness on Property
2. If the unpaid obligation arose from purchase
of goods or services: Deductions are allowed when a decedent leaves
property encumbered by a mortgage or
a. Documents confirming purchase of goods or
indebtedness in good faith and for adequate
services, including sales invoices, delivery receipts,
consideration, including the fair market value of the
contracts, and creditor statements, must be
property and outstanding debt – the amount
acknowledged, executed, and signed by the
allowed as a deduction.
decedent-debtor and creditor.
Accommodation Loan
b. unpaid balance of the debt with interest:
notarized Certification from the creditor Where the loan proceeds went to another person,
the value of the unpaid loan must be included as a
 creditor - corporation: certified by the
receivable of the estate.
principal officers of the corporation
 creditor – partnership: certified by any of the  a legal impediment to recognize the same
general partners as receivable of the estate, said unpaid
obligation/mortgage payable shall not be

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 allowed as a deduction from the gross Legacies to the Philippine Red Cross (PRC)
estate.
RA 10072. The Philippine Red Cross Act of 2009
RULE: In all instances, the mortgaged property, to
 Donations, legacies, and gifts to the PRC
the extent of the decedent's interest therein, should
are exempt from donor's tax and deductible
always form part of the gross estate.
from the donor's gross income or the donor-
3. Taxes decedent's net estate.
C. Vanishing Deductions (Property Previously
These are unpaid taxes that accrued prior to the Taxed)
death of the decedent. However, the following are
not allowed as a deduction: It is an amount allowed to reduce the taxable estate
of a decedent where a property included in his
 Income tax on income received after death gross estate was previously received by him, either:
 Property taxes accrued after death
 Estate tax  From a prior decedent by way of inheritance
– estate tax; OR
4. Claims against Insolvent Persons (CAIP)  From a donor by way of gift or donation –
donor’s tax
 Claims against the estate - receivables
due or owing from persons who are not Requisites for Deductibility
financially capable of meeting their
obligations 1. Death - the present decedent died within 5 years
from the date of death of the prior decedent OR
Requisites for Deductibility date of gift
For purposes of estate taxation, a judicial 2. Identity of property - the property sought for
declaration of insolvency is not required but deduction can be obtained from the prior decedent,
the donor, or the property acquired in exchange for
a. The incapacity of the debtor to pay his obligation
the original property
should be PROVEN;
3. Location - the property on which vanishing
b. The full amount owed by the insolvent must first
deduction: within the Philippines
be included in the decedent's gross estate and the
amount uncollectible shall be allowed as a 4. Inclusion of the property - the property must
deduction; and have been part of the prior decedent's Philippines
c. If the insolvent could only pay partial amount, the gross estate or included in the donor's gifts within
full amount owed shall be included in the gross five years of the present decedent's death
estate, and the amount uncollectible shall be 5. Previous taxation of the property - the estate
allowed as a deduction. tax on the prior succession or the donor's tax on
B. Transfer for Public Use the gift must have been finally determined and paid
by the prior decedent or by the donor as the case
 Transfers For Public Use (TFPU) - maybe
dispositions in a last will and testament or
transfers to take effect after the death in 6. No previous vanishing deduction on the
favor of the government of the Philippines or property - no such deduction on the property, or
any of its political subdivisions thereof (e.g. the property given in exchange therefore, was
barangay, province, city/municipality) for allowed in determining the value of the net estate of
exclusively public purposes. the prior decedent.

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Vanishing Deduction Rates The amount of family home allowable as a
deduction would be whichever is lower of
Period (from receipt up to the Rate
decedent’s death)
 P10,000,000 or
Within one year 100%
Beyond one year to 2 years 80%  the fair market value at the time of the
Beyond 2 years to 3 years 60% decedent's death, of the family home and
Beyond 3 years to 4 years 40% the land on which it stands.
Beyond 4 years to 5 years 20%
RULE: The family home is generally characterized
by permanency, that is, the place to which,
whenever absent for business or pleasure, one still
intends to return.
Unmarried Head of a Family
An unmarried or legally individual with parent/s,
sibling/s, or legally children living with and
dependent upon him, where such brothers or
sisters or children are:
 not more than twenty one (21) years of age,
unmarried and not gainfully employed, or
 regardless of age are incapable of self-
support because of mental or physical
defect, or
 any of the beneficiaries mentioned in Article
154 of the Family Code who is living in the
II. Special Deductions
family home and dependent upon the head
A. Standard Deduction of the family for legal support
This amount shall be allowed as an additional Beneficiaries of a Family Home
deduction WITHOUT need of substantiation. The
 The husband and wife, or the head of a
full amount shall be allowed as deduction for the
family; and
benefit of the decedent. The allowable amounts
 The family includes all members, including
under the TRAIN Law are:
legitimate and illegitimate relatives, living in
 If the decedent is a citizen or resident - the home and relying on the family head for
P5,000,000 legal support.
 If the decedent is a nonresident alien-
Limitation
P500,000
 a person may constitute only one (1) family
NOTE: This is the only special deduction allowed to
home.
a NRA decedent.
Requisites for Deductibility
B. Family Home
1. The decedent was married or if single, was a
 Family Home - The dwelling house,
head of the family
including its land, is where the husband and
wife, or a family head, reside, as certified by 2. The decedent must own the family home and
the local Barangay Captain. land, so the fair market value of the home should
be included in the decedent's gross estate
computation.

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3. The family home must be the actual residence of 2. Fill up the Estate Tax Return (BIR Form 1801)
the decedent and his family at the time of his death,
ILLUSTRATION
as certified by the local Barangay Captain.
4. The deduction must be equal to the current fair
market value of the family home OR the decedent's
interest, not exceeding P10,000,000, whichever is
lower.
NOTE: For married decedents, the FMV of the
family home should be divided by two (2) if the
same is conjugal of community property.
C. Amounts Received by Heirs under RA 4917
R.A. No. 4917 allows heirs to receive retirement
benefits from a decedent's employer, as long as it's
included in the decedent's gross estate.
III. Net Share of the Surviving Spouse in the
Conjugal Partnership Property
The net share is equivalent to 1⁄2 or 50% of the
conjugal property after deducting the obligations
chargeable (ordinary deductions only) to such
property. The share of the surviving spouse must
be removed to ensure that only the decedent's
interest in the estate is taxed.
Deductions from the Gross Estate of a
Nonresident Alien

Estate Tax Return Preparation

1. Compute the correct estate tax due
Gross estate xx
LESS: Allowable deductions
Ordinary deductions
Standard deductions 500,000 (xx)
Taxable net estate xx
MULTIPLY BY: Estate tax rate xx
Estate tax due xx

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Made by: DVGRF