Deductions From Gross Estate PDF

DEPARTMENT OF ACCOUNTANCY HOLY ANGEL UNIVERSITY DEDUCTIONS FROM GROSS ESTATE Presentation of Deductions in the Estate Tax Return EXCLUSIVE CONJUGAL/ TOTAL COMMUNAL GROSS ESTATE...

DEPARTMENT OF ACCOUNTANCY HOLY ANGEL UNIVERSITY DEDUCTIONS FROM GROSS ESTATE Presentation of Deductions in the Estate Tax Return EXCLUSIVE CONJUGAL/ TOTAL COMMUNAL GROSS ESTATE P XXX P XXX P XXX Less: ORDINARY DEDUCTIONS (XXX) (XXX) (XXX) Estate after Deductions XXX XXX XXX Less: SPECIAL DEDUCTIONS (XXX) NET ESTATE XXX Less: SHARE OF SURVIVING SPOUSE *1/2 (XXX) NET TAXABLE ESTATE XXX  CLASSIFICATION OF DEDUCTIONS 1. Ordinary Deductions 2. Special Deductions 3. Share of the Surviving Spouse  General Principles of Estate Deduction 1. Substantiation Rule - Supported with documentary evidence 2. Matching Principle - Must pertain to properties that are part of gross estate 3. “No double classification” rule - Cannot be claimed simultaneously 4. Default presumption on ordinary deduction ORDINARY DEDUCTIONS 1. Losses, Indebtedness and Taxes (LIT) 2. Transfer for Public Use 3. Vanishing Deductions  ORDINARY DEDUCTIONS – LOSSES, INDEBTEDNESS, TAXES 1. LOSSES - May arise from casualty such as fires, storms, shipwreck, robbery, theft when such losses are not compensated for by insurance. DATE OF DEATH DEADLINE OF RETURN One year Non-Deductible Deductible Non-Deductible 1. Loss must be a sustained casualty loss 2. The loss must occur during the settlement of the estate up to the deadline of the estate tax return 3. The loss must not be concurrently claimed in the income tax return  ORDINARY DEDUCTIONS – LOSSES, INDEBTEDNESS, TAXES Claims against Insolvent persons - Form of loss but is presented as a separate item of deduction in the tax return - Deductible amount = Unrecoverable amount of claim PROPERTY CLASSIFICATION RULE - Loss on separate property = deduction against separate property - Loss of common property = deduction against common property  ORDINARY DEDUCTIONS – LOSSES, INDEBTEDNESS, TAXES 2. CLAIMS AGAINST THE ESTATE (INDEBTEDNESS) - May arise out of contract, tort, or operations of law. Requisites of deductibility of claims against the estate: - the liability represents a personal obligation of the deceased existing at the time of his death except unpaid medical expenses -liability was contracted in good faith and for adequate and full consideration in money or money’s worth -claim must be a debt or claim which is valid in law and enforceable in court -indebtedness must not have been condoned by the creditor or the action to collect from the decedent must not have prescribed * Unpaid Mortgage – claims against the estate but are separately reported from the claims against the estate. ORDINARY DEDUCTIONS – LOSSES, INDEBTEDNESS, TAXES CLASSIFICATION RULES FOR CLAIMS AGAINST THE ESTATE Family Benefit Rule VS Property Classification Rule  ORDINARY DEDUCTIONS – LOSSES, INDEBTEDNESS, TAXES 3. UNPAID TAXES – income tax, business tax, and property tax which have accrued as of the death of the decedent and which were unpaid as of the time of death. ACCOMODATION LOAN- one contracted by a person in behalf of another person with the contracting person merely representing in behalf of the other person who will be the beneficiary of the loan proceeds. Accomodation loan are presented as a receivable in the gross estate and is presented as a deduction. ORDINARY DEDUCTIONS – TRANSFER FOR PUBLIC USE -all bequest, legacies, devises or transfer to or for the use of the government of the Republic of the Philippines, or any political subdivision thereof, for the exclusive public purposes -must be indicated in the decedent’s last will and testament ORDINARY DEDUCTIONS – VANISHING DEDUCTIONS - Series of double transfer taxation (Within 5 years) - The death of the decedent is preceded by a donation inter- vivos - The death of the decedent is preceded by a donation mortis causa ORDINARY DEDUCTIONS – VANISHING DEDUCTIONS 1. Determine the initial value – fair market value of the property at the date of the first transfer or at the date of death whichever is LOWER. 2. Determine the Initial basis – initial value reduced by any indebtedness on the property which was assumed and paid before death 3. Determine the final basis – initial basis reduced by a proportion of other ordinary deductions (LIT + Transfer for public use) 4. Determine the vanishing deduction – final basis multiplied by the following vanishing percentages ORDINARY DEDUCTIONS – VANISHING DEDUCTIONS If the decedent died within Vanishing Percentage 1 year from receipt of the property 100% 2 years from receipt of the property 80% 3 years from receipt of the property 60% 4 years from receipt of the property 40% 5 years from receipt of the property 20% More than five years 0% SPECIAL DEDUCTIONS 1. Family Home 2. Standard Deductions 3. Benefits under RA 4917  Family Home -includes the dwelling house, and the land on which it is situated, where the decedent and/or members of his family reside as certified by the barangay captain of the locality - The allowable amount must not exceed the lowest of fair market value of the family home as declared or P10,000,000 Standard Deduction - A deduction amounting to P5,000,000 shall be allowed as an additional deduction without the need for substantiation. Benefits under RA 4917 - Retirement or termination benefit received by the employee - Ordinary deductions = Full deductions - Special Deductions = 50% deductions Share of the Surviving Spouse - one-half of the net conjugal or community properties of the spouses. Needless to say, only married decedents have this deduction. After deducting the allowable deductions appertaining to the conjugal or community properties included in the gross estate, the share of the surviving spouse must be removed to ensure that only the decedent’s interest in the estate is taxed. Deductions Allowed to Non-Resident Alien Decedents 1. Prorated Losses, Indebtedness, and Taxes 2. Property previously taxed (Vanishing Deductions) -must be within the Philippines 3. Transfer for public purpose 4. Share of the Surviving Spouse 5. Standard Deduction – P500,000 Summary of Deduction Rules Residents or Citizens Non-Resident Aliens Losses YES Pro-rated amount Claims against the estate YES Indebtedness YES Taxes YES Transfer for Public Use YES YES Vanishing Deductions YES YES Family Home YES NO Standard Deductions YES YES Benefits under RA 4917 YES NO Share of the surviving spouse YES YES References Business and Transfer Taxation 2019 edition by Rex Banggawan CPA Reviewer in Taxation 2018 edition by Enrico D. Tabag Reviewer in Taxation by Asser S. Tamayo CPAR RESA