TAXATION OF INDIVIDUALS

Classification of Individual Taxpayers

For Income tax purposes, individual taxpayers are classified as follows:
1. Resident Citizen – An individual whose residence is within the Philippines and who is a citizen thereof.
2. Non-Resident Citizen – is a citizen who:
A. establishes to the satisfaction of the Commissioner the fact of his physical presence abroad, with a
definite intention to reside therein,
B. Leaves the Philippines during the taxable year to reside abroad either as an immigrant or for
employment on a permanent basis,
C. Works and derives income from abroad and whose employment thereat requires him to be
physically present abroad most of the time (not less than 183 days) during the taxable year.

A citizen who has been previously considered as non-resident citizen and who arrives in the Philippines
at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a
nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income
derived from sources abroad until the date of his arrival in the Philippines.

3. Resident alien – means any individual whose residence is within the Philippines and who is not a citizen
thereof.

4. Nonresident alien – means an individual whose residence is not within the Philippines and who is not a
citizen thereof. A nonresident alien is classified into:
A. Engaged in Trade or Business in the Philippines (ETB) – refers to a nonresident alien who shall come
to the Philippines and stay for an aggregate period of more than 180 days during any calendar year,
or,
B. Not Engaged in Trade or Business in the Philippines (NETB) – refers to a nonresident alien who shall
come to the Philippines and stay for an aggregate period of 180 days or less during any calendar year.

General Principles of Income Taxation on Individuals

1. A resident citizen is taxable on income derived from sources within and without the Philippine.
2. A nonresident citizen is taxable only on income derived from sources within the Philippines.
3. A citizen of the Philippines who is working and derived income from abroad as an overseas contract worker
is taxable only on income from sources within the Philippines.
4. An alien individual whether a resident or not in the Philippines is taxable only on income derived from
sources within the Philippines.

The following table summarizes the situs of taxable income of individual tax[payer:

Individual Taxpayer Income Within Income Without

1. Resident Citizen Taxable Taxable
2. Resident Alien Taxable Not Taxable
3. Nonresident Citizen Taxable Not Taxable
4. Nonresident Alien ETB Taxable Not Taxable
5. Nonresident Alien NETB Taxable Not Taxable

Tax on Income Earnings and Money Remittances of Overseas Contract Workers (OCW) / Overseas Filipino
Workers (OFW)
OCW refers to Filipino citizens employed in foreign countries, commonly referred to as OFWs who are
physically present in foreign country as a consequence of their employment thereat.
Their salaries and wages are paid by an employer abroad and is not borne by any entity or person in
the Philippines. To be considered as an OCW or OFW, they must be truly registered as such in the Philippine
Overseas Employment Administration (POEA) with a valid Overseas Employment Certificate (OEC).
Seafarers or seamen are Filipino citizens who receive compensation for services rendered abroad as
member of the complement of a vessel engaged exclusively in international trade.
To be considered as an OCW or OFW they must be duly registered as such with the POEA and with
valid Overseas Employment Certificate (OEC) with a valid Seafarers Identification Record Book (SIFB) or
Seaman’s Book issued by the Maritime Industry Authority (MARINA).
 An OCW is taxable only on income from sources within the Philippines. Thus, OCW or OFWs income
rising out of his employment is exempt from income tax.
If an OCW or OFW has income earnings from business activities or properties within the Philippines,
such income earnings are subject to regular income tax.
However, it shall be exempt from 15% final tax on interest income from a depository bank under the
expanded foreign currency deposit system upon presentation of proof of non-residency such as OEC or
Seaman’s Book.
If an account is in the name of the OCW or a Filipino seaman, and an individual (spouse or dependent)
who is living in the Philippines, 50% of the interest income from such bank deposit will be treated as exempt
wjile the other 50% shall be subject to a final withholding tax of 15%.

Kinds of Income of Individual Taxpayer

1. Compensation Income – means all remuneration for services performed by an employee under the
employer-employee relationship.
= such as salaries, wages, emoluments and honoraria, allowances, commissions, fees, taxable bonuses
and fringe benefits
2. Business Income – earned by a sole proprietor or an independent contractor who reports income
earned from self-employment.
= it includes those hired under a contract of service or job order.
3. Professional Income –earned by professionals whose income is derived purely from the practice of
profession and not under the employer-employee
4. Passive Income – income earned without working actively, they are subject to different final
withholding tax rates.

PASSIVE INCOME
Passive incomes are incomes subject to final withholding tax and shall not be included in the gross
income of the taxpayer. The liability for payment of the tax rests primarily on the payor as a withholding
agent. The payee is not required to file an income tax return for the particular income.

EXAMPLES
A. Income payments to an individual subject to final taxes

Resident or Citizen
1. Interest from any currency bank deposit 20%
2. Royalties 20%
3. Royalty on books and other literary works, musical compositions 10%
4. Winnings (in raffles) 20%
5. PCSO and LOTTO winnings (P 10,000 or less) Not taxable
6. PCSO and LOTTO winnings (more than P 10,000) 20%
7. Dividend from domestic corporation 10%

NCOME TAX RATES – Effective January 1, 2018 until December 31, 2022: (TRAIN LAW)

Over Not Over Tax Plus of Excess Over

250,000 0%
250,000 400,000 20% - 250,000
400,000 800,000 30,000 25% 400,000
800,000 2,000,000 130,000 30% 800,000
2,000,000 8,000,000 490,000 32% 2,000,000
8,000,000 , 2,410,000 35% 8,000,000

For Married individuals, the husband and wife shall compute separately their income tax based on
their respective total taxable income.
Provided, that 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 spouses for the
purpose of determining their respective taxable income.
ILLUSTRATION
Ana, married, supporting her mother and 2 minor children, has the following income and expenses:
Salary 80,000
Allowances 6,000
Professional Income as CPA 25,000
Gross income from business 200,000
Expenses – practice of profession 5,600
Expenses – Business 130,000
REQUIRED: Compute for the income tax due using the graduated rates of tax.

ANSWER:
Salary 80,000
Allowances 6,000
Professional Income as CPA 25,000
Gross income from business 200,000
TOTAL 311,000
Less: Deductions
Expenses – practice of profession 5,600
Expenses – Business 130,000 135,600
Taxable Income 175,400 below P 250,000 exempt
=======
Tax on P 175,400 = Exempt

NCOME TAX RATES – Effective January 1, 2018 until December 31, 2022:

Over Not Over Tax Plus of Excess Over

250,000 0%
250,000 400,000 20% - 250,000
400,000 800,000 30,000 25% 400,000
800,000 2,000,000 130,000 30% 800,000
2,000,000 8,000,000 490,000 32% 2,000,000
8,000,000 , 2,410,000 35% 8,000,000

Taxable income is P 2,680,000

2,680,000
(2,000,000) = 490,000
680,000 x 32% = 217,600
707,600

Assume Taxable Income = P 375,000 -how much is the income tax payable?

Taxable income is P 375,000

Tax due is: 375,000
(250,000)
125,000 x 20% = 25,000 Income tax payable

Taxable Income is P 950,000

950,000
(800,000) = 130,000
150,000 x 30% = 45,000
175,000
ILLUSTRATION
Bernard, single, supporting his brother who is 30 years old and mentally defective had the following
data in 2018:
Income from profession 450,000
Interest on bank deposit (net of 20% final tax) 4,000
Winnings in a raffle 100,000
Prize won in a contest 5,000
Dividend from C Corp., a domestic corporation 6,000
Salary as part-time teacher (net of SSS contribution
and P 2,400 creditable withholding tax) 17,600
Rental income, net of creditable W/tax of 5% 38,000
Expenses incurred (Rental) 60,000
REQUIRED: Compute the following:
1. Income tax payable based on the graduated income tax rates.
2. Final withholding taxes on the passive incomes

ANSWER:
1.
Income from profession 450,000
Prize won in a contest 5,000
Salary ( P17,600 + 2,400) 20,000
Rental income (38,000 / 95%) 40,000
Gross Income 515,000
Expenses incurred 60,000
Taxable Income 455,000
455,000 =======
Tax of (400,000) = 30,000
55,000 x 25% = 13,750
Income tax due = 43,750
Less: Tax credit
W/tax on salary = 2,400
W/tax on rent 2,000 4,400
Income tax payable = 39,350
======
2. Final taxes on passive income
a) Interest on bank deposit (4,000 / 80%) = 5,000
Rate of tax 20%
Final withholding tax = 1,000

b) Winnings in a raffle = 100,000

Rate of tax 20%_
Final withholding tax = 20,000

c) Dividend from C Corp. = 6,000

Rate of tax 10%_
Final withholding tax = 600
Notes:
1. Interest on bank deposit, winnings in raffle and dividends from domestic company are passive
incomes. Do not form part of taxable income.
2. Prizes amounting to P 10,000 or less are not subject to final tax.
3. Compensation and business income must be declared at gross of creditable withholding tax.
4. Salaries and rent income are subject to withholding tax. The amount of taxes previously withheld shall
be credited from the incme tax due because these are considered as advance payments of their tax
liability.
Allowable deductions from income of Individual Taxpayers
The deductions allowed shall depend on the nature of income earned by the taxpayer, as follows:
1. Compensation income and Passive income – no deductions are allowed
2. Business / Professional – either itemized deductions or optional standard deduction

ILLUSTRATION
Pepe and Pilar, husband and wife, with 5 qualified dependent children had the following income in
2018:
Compensation income:
Pepe ( gtoss of w./tax oF 13,500) 242,000
Pilar (net of withholding tax of P 10,000) 130,000
Gross income on conjugal property of spouses 260,000
Expenses on conjugal property 30,000

The spouses are paying a total insurance premium of P 300 a month to X Insurance Co. on the
hospitalization insurance of the members of the family.

REQUIRED: Compute following:

1. Income tax payable/overpayment by each spouse.
2. Aggregate amount payable/overpayment of the spouses.

ANSWER:
1) Income tax payable by Pepe
Gross compensation income 242,000
Share in net conjugal property (260,000 / 2) = 130,000
Less: Share in conjugal expense (30,000 / 2) 15,000 115,000
Taxable income 357,000
357,000
Tax on P 250,000 Exempt
107,000 x 20% = 21,400
Less: W/tax 3,500__
Income Tax payable 7,900

2) Income tax payable by Pilar

Gross compensation income(130,000 + 10,000) 140,000
Share in net conjugal property 115,000
Taxable income 255,000
255,,000
Tax on P 250,000 Exempt
5,000 x 20% = 1,000
Less: W/tax 10,0000__
Oerpayment (9,000)

3) Aggregate amount payable/overpayment by the spouses

Income tax payable on Pepe 7,900
Excess tax withheld on Pilar (9,000)
Overpayment (Tax refund) of the spouses = (1,100)
=======
Notes:
1) The insurance premium is not deductible.
2) Income from conjugal property of spouses are to be divided equally between the spouses.
OPTIONAL STANDARD DEDUCTION (OSD)
In lieu of itemized deductions, an individual taxpayer (exept a nonresident alien) may elect a standard
deduction in an amount not exceeding 40% of his gross sales or receipts, as the case may be. However, the
following conditions must be satisfied:
A) That he signified his intention to elect optional standard deduction by checking the appropriate box in
the income tax return filed for the first quarter or the initial quarter of the taxable year after the
commencement of a new business/practice of profession.
B) Once the election is made, it must be consistently applied to all the succeeding quarterly returns and in
the final income tax return for the taxable year.

The purpose of the optional standard deduction is to facilitate the audit or review of tax returns
because there is no need on the part of the administrativetaxing personnel to determine which items are
allowed to be deducted or not.
Under a different method of accounting (
If the individual is on the accrual basis of accounting for income and deductions, the optional standard
deduction shall be based on the gross sales during the taxable year.

On the other hand, if the individual employs the cash basis accounting for his income and deductions,
the optional standard deduction shall be based on gross resipts during the taxable year.

For other individual taxpayers allowed by law to report their income and deductions other than the
cash and accrual method of accounting the gros sales or gross receipts shall be determined in accordance
with the accepatable method of accounting.

ILLUSTRATION

Juan Castro, married with (5) dependent children, had the following income and expenses during the
year:

INCOME TAXATION (With Tax Principles & Remedies) AMPONGAN

Income:
Salary from Manding Pural Company P200,000
Gross receipts from business (Cost of sales, P450,000) 950,000
Gross receipts from profession 150,000
Gain on sale of capital asset 30,000

Joint expenses/Losses:
Salaries of employees 500,000
Rent of office space 24,000
Depreciation of office and store equiptment 30,000
Taxes and licences 10,000
Bad debts 7,500
Light and water 18,000
Loss on sale of capital asset 20,000

REQUIRED: Compute the income tax due assuming Castro availed of:

1. Itemized deduction
2. Optional standard deduction
3. Given the above data, which option should Jun Castro choose –
the itemized deduction or the optional deduction?

Answer:
1. Taxpayer availed of itemized deduction.

Salary P200,000
Add: Self-employment income
Gross receipts- business P950,000
Less: Cost of sales 450,000 P500,000
Gross receipts-profession 150,000
Net capital gain:
Capital gain 30,000
Capital loss (20,000) 10,000 660,000
Total 860,000
Less: Itemized deductions
Salaries 500,000
Rent expense 24,000
Depreciation 30,000
Taxes and licenses 10,000
Bad debts 7,500
Light and water 18,000 589,500
Taxable income 270,500

Tax on P250,000 Exempt

20,500 x 20% P 4,100

2. Taxpayer availed of optional standard deduction

Salary P200,000
Self-employment income:
Gross receipts – business P 950,000
Gross receipts – profession 150,000
Total 1,100,000
Less: Optional standard deduction
(1,100,000 x 40%) 440,000 660,000
Other income – net capital gain 10,000
Taxable income 870,000

Tax on P800,000 P 130,000

70,000 x 30% 21,000
Income tax 151,000

Since deductions are not allowed on compensation income, the 40% should be based only on the
Self - employment income.

3. Jun Castro should avail of the itemized deductions because he will pay lesser income tax. If he avails of
itemized deductions, the tax liability will be P4,100 only instead of P151,000.
Illustrations 8-8

An individual taxpayer has the following income and expenses during the year:

Compensation income, Philippines P250,000

Self-employment income, Philippines 300,000
Other income, U.S.A U.S. $10,000
Other income, Hongkong H.K. $ 30,800
Expenses, Philippines P120,000
Expenses, U.S.A U.S. $ 4,000
Expenses, Hongkong H.K. $ 4,800
Interest on bank deposit with PNB P 4,000

Convertion rate: U.S. $ 1.00 = P 50.00

U.S. $ 1.00 = H.K. $ 8.00

REQUIRED: Compute the income tax due if the taxpayer is:

1. Elcano, Filipino, residing in Naga City, single, supporting his mother who resides abroad.

2. Bercasio, Filipino, married, resident of Canada.

3. Nakamura, Japanese, married with one dependent child, both residing in Manila.

4. Frances, French, married with five (5) dependent children, residing in Hongkong but doing business in
the Philippines, U.S.A, and Hongkong.

Assume that French law grants exemption to Filipinos not residing in France as follows: Married
– P30,000; Every dependent child – P10,000.

5. Brittania, British, married, residing in London and doing business in the United States and Hongkong.
Assume that his income in the Philippines are the self-employment income and interest only.

Answer:

1. Taxpayer is Resident Citizen

Compensation income, Philippines P 250,000

Self-employment income, Philippines 300,000
Other income, U.S.A. ($ 10,000 x 50) 500,000
Other income, Hongkong ($ 30,800/8 x 50)