Income_Taxation-3rd-Topic.pptx

Types of Income Subject to Tax Group 1 Types of Income Subject to Tax Ordinary or Regular Income Passive Income Derived from the Philippine Sources / Passive income Capital Gains  ORDINARY OR REGULAR INCOME is the income you receive from your p...

Types of Income Subject to Tax Group 1 Types of Income Subject to Tax Ordinary or Regular Income Passive Income Derived from the Philippine Sources / Passive income Capital Gains  ORDINARY OR REGULAR INCOME is the income you receive from your primary job or employment. It's typically the salary or wages you earn on a regular basis. Ex. Salary Wages ORDINARY OR REGULAR INCOME Annual Taxable Tax Rate Income Up to 250,000 PHP Exempt 250,001 - 400,000 20% PHP 400,001 - 800,000 25% PHP 800,001 - 30% 2,000,000 PHP 2,000,001 - 32% 8,000,000 PHP  ORDINARY OR REGULAR INCOME Scenario: Monthly Basic Salary: 50,000 PHP Additional Monthly Income: 10,000 PHP (e.g., overtime pay, allowances) Monthly Deductions: – SSS: 500 PHP – PhilHealth: 300 PHP – Pag-IBIG: 100 PHP  ORDINARY OR REGULAR INCOME Calculations: 1. Annual Gross Income: – (50,000 PHP + 10,000 PHP) x 12 months = 720,000 PHP 2. Annual Deductions: – (500 PHP + 300 PHP + 100 PHP) x 12 months = 10,800 PHP 3. Annual Taxable Income: – 720,000 PHP - 10,800 PHP = 709,200 PHP 4. Income Tax: – Based on the progressive tax rates in the Philippines, you'd fall into the tax bracket for annual taxable income over 400,001 PHP. – The tax calculation would involve multiple tiers based on the tax brackets. However, for a simplified estimate, you can use the average tax rate for your income level. Assuming an average tax rate of 25% for this income range: 709,200 PHP x 25% = 177,300 PHP Therefore, the estimated annual income tax for this employee would be 177,300 PHP.  Passive Income Derived from the Philippine Sources / Passive Income is income earned with minimal effort or involvement after the initial setup. It's a type of income that continues to generate revenue even if you're not actively working on it. *Income earned in The Philippines Ex: Rental income: Income from renting out property (e.g., apartments, houses, commercial spaces) Dividend income: Income from owning shares of stock in a company Interest income: Income from savings accounts, bonds, or investments Royalty income: Income from intellectual property such as books, music, or inventions  Passive Income Derived from the Philippine Sources / Passive Income Interest Income 15% - 25% Dividend 10% - 25% Income Royalties 10%-25% Prizes 20% - 25% Other Winnings 20% - 25%  Passive Income Derived from the Philippine Sources / Passive Income Scenario: Investment in a Philippine Bank: 1,000,000 PHP Annual Interest Rate: 5%  Passive Income Derived from the Philippine Sources / Passive Income Calculations: 1. Annual Interest Income: – 1,000,000 PHP x 5% = 50,000 PHP 2. Withholding Tax: – Since the investment is in a Philippine bank, the withholding tax rate for interest income is 20%. – 50,000 PHP x 20% = 10,000 PHP Therefore, the investor will receive a net interest income of 50,000 PHP - 10,000 PHP = 40,000 PHP.  CAPITAL GAINS is the profit you make when you sell an asset for more than you paid for it. This asset can be anything from a house or a car to stocks or bonds.  CAPITAL GAINS The capital gains tax in the Philippines varies depending on the type of asset sold. Here's a breakdown of some common types: 1. Real Property: – Ordinary residential property: 6% of the selling price – Capital gains tax on sale of ordinary residential property: 6% of the selling price, subject to certain conditions and exemptions – Capital gains tax on sale of principal residential house and lot: Tax-exempt, subject to certain conditions – Commercial property: 6% of the selling price 2. Shares of Stock: – Listed shares: Tax-exempt if held for more than 180 days – Unlisted shares: 15% of the capital gains 3. Other Assets: – Machinery and equipment: 15% of the capital gains  CAPITAL GAINS Example 1 – Selling a piece of land Asset: A piece of land Purchase Price: 500,000 PHP Selling Price: 1,000,000 PHP  CAPITAL GAINS Example 1 – Selling a piece of land Calculation: 1. Capital Gains: – Selling Price - Purchase Price = 1,000,000 PHP - 500,000 PHP = 500,000 PHP 2. Capital Gains Tax: – Assuming the land is considered a capital asset, the capital gains tax rate is 6% of the capital gains. – 500,000 PHP x 6% = 30,000 PHP Therefore, the capital gains tax on the sale of the land would be 30,000 PHP.  CAPITAL GAINS Example 2: Selling Machinery (Capital Loss) Let's say you bought a machine for your business for 500,000 PHP. After a few years, you decide to sell it for 300,000 PHP. Capital Loss: 300,000 PHP - 500,000 PHP = -200,000 PHP In this case, you've incurred a capital loss. Capital losses can be used to  CAPITAL GAINS Example 3: Selling Machinery (Capital Gain) Let's say you bought a machine for your business for 300,000 PHP. After a few years, you decide to sell it for 500,000 PHP. – Capital Gain: 500,000 PHP - 300,000 PHP = 200,000 PHP In this case, you've incurred a capital gain. Assuming the machine is considered a capital asset, you would need to pay a capital gains tax on the profit. – Capital Gains Tax: 200,000 PHP x 15% = 30,000 PHP  Special Cases Certain individuals like senior citizens and PWDs are eligible for tax exemptions. These exemptions provide relief to vulnerable groups, reducing their tax burden. Ex. Lito, a senior citizen, earns ₱150,000 from his pension. He is exempt from paying income tax on this amount. Special cases must be considered to ensure compliance with tax laws.  Filing and Payment of Taxes Taxpayers are required to file their returns quarterly and annually. Timely filing ensures compliance with tax laws and avoids penalties. Ex. Maria, a freelance professional, files her quarterly tax return by May 15th and her annual return by April 15th of the following year. Adhering to filing deadlines is crucial to avoid legal issues.  Final Withholding Tax and Capital Gains Tax Certain types of income are subject to Final Withholding Tax or Capital Gains Tax. These taxes ensure that income from specific sources is taxed appropriately. Ex. Pedro sells shares of a domestic corporation directly to a buyer. The sale is subject to Capital Gains Tax of 15% on the profit earned. Understanding these taxes is key to accurate tax computation.  Ordinary vs. Capital Assets Assets are classified as either ordinary or capital, affecting how gains are taxed. This classification determines whether gains are taxed as ordinary income or capital gains. Ex. A parcel of land used in Pedro's business is classified as an ordinary asset, and its sale is subject to regular income tax, while his family home is a capital asset, and its sale is subject to Capital Gains Tax. Proper asset classification ensures correct tax reporting. Tax Exemptions and Benefits for Senior Citizens, PWDs Senior citizens and PWDs enjoy specific tax exemptions. These exemptions help reduce the financial burden on these groups. Ex. Ana, a senior citizen with a total income of ₱200,000 from her pension, is exempt from paying income tax. Tax exemptions are important for reducing tax liability.