Types of Income Subject to Tax Group 1

Types of Income Subject to Tax

• Income can be categorized into Ordinary Income, Passive Income, and Capital Gains.

Ordinary or Regular Income

• Ordinary income includes wages and salaries earned from employment.

• Annual taxable income brackets in the Philippines:

  • Exempt for income up to 250,000 PHP.
  • 20% for income between 250,001 - 400,000 PHP.
  • 25% for income between 400,001 - 800,000 PHP.
  • 30% for income from 800,001 - 2,000,000 PHP.
  • 32% for income from 2,000,001 - 8,000,000 PHP.

• Example Calculation:

  • Monthly salary of 50,000 PHP and additional income of 10,000 PHP results in an annual gross income of 720,000 PHP.
  • After annual deductions of 10,800 PHP, annual taxable income is 709,200 PHP.
  • Estimated annual tax: 709,200 PHP x 25% = 177,300 PHP.

Passive Income

• Passive income is generated with minimal effort after initial input.

• Examples of passive income include:

  • Rental income from property (e.g., apartments, commercial spaces).
  • Dividend income from shares of stock.
  • Interest income from savings or investments.
  • Royalty income from intellectual property.

• Tax rates for passive income:

  • Interest income: 15% - 25%.
  • Dividends: 10% - 25%.
  • Royalties: 10% - 25%.
  • Prizes and other winnings: 20% - 25%.

• Example Calculation:

  • An investment of 1,000,000 PHP at a 5% interest rate yields an annual interest income of 50,000 PHP.
  • Withholding tax on interest: 50,000 PHP x 20% = 10,000 PHP, resulting in a net interest income of 40,000 PHP.

Capital Gains

• Capital gains arise from selling assets for more than their purchase price.

• Common capital gains taxes based on asset type:

  • Ordinary residential property: 6% of selling price.
  • Principal residential house: tax-exempt under certain conditions.
  • Commercial property: 6% of selling price.
  • Listed shares: tax-exempt if held for over 180 days; unlisted shares taxable at 15%.
  • Machinery and equipment: 15% of capital gains.

• Example Calculations:

  • Selling a piece of land purchased for 500,000 PHP and sold for 1,000,000 PHP results in a capital gain of 500,000 PHP, with a capital gains tax of 30,000 PHP (500,000 PHP x 6%).
  • A capital loss occurs when an asset sells for less than its purchase price; for instance, selling machinery bought for 500,000 PHP for 300,000 PHP results in a loss of 200,000 PHP.

Special Cases

• Exemptions from income tax are available for certain individuals such as senior citizens and persons with disabilities (PWDs).
• Timely filing of tax returns is crucial to avoid penalties; quarterly returns are due on specific dates, and annual returns are typically required by April 15th.

Final Withholding Tax and Capital Gains Tax

• Specific types of income are subject to Final Withholding Tax or Capital Gains Tax, ensuring accurate taxation on profits from particular transactions, such as the sale of shares of stock.

Ordinary vs. Capital Assets

• The classification of assets as either ordinary or capital impacts the taxation of gains; ordinary income is taxed differently than capital gains.

This quiz explores different types of income subject to taxation, focusing on ordinary or regular income, passive income derived from Philippine sources, and capital gains. Understanding these concepts is crucial for effective tax planning and compliance. Test your knowledge on income categories and their tax implications.