03 chapter 4 deductions from gross estate part 01

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TAXATION

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  • 1. Taxation 2 DEDUCTIONS FROM GROSS ESTATE FLABERT VILLASENCIO, CPA Notre Dame of Dadiangas University

2. Deductions oAre items allowed by law to be deducted to the gross estate in order to arrive at the net taxable estate. oOnly those allowed by law shall be claimed as deduction. oThese items must be able to justify and should be proved that the expenses really exist. 3. ORDINARY SPECIAL Expense sLosses Indebtedness Taxes Transfer for public use Amount received by heir under RA 4917 Vanishing deductions Share of surviving spouse Funeral Judicial Claims against the estate Claims against insolvent person Family home Medical Expenses Standard deduction 4. Funeral Expenses oActual funeral expenses means cost incurred in connection with the internment or burial of the deceased with official receipts oThe amount allowed as deductions shall equal to the ACTUAL EXPENSES incurred OR the 5% of the GROSS ESTATE whichever is LOWER but in NO CASE shall exceed P200,000. 5. Example. Compute the amount deductible funeral expenses in each of the following cases: Case Gross estate Actual Funeral Expenses 1 P500,000 P70,000 2 2,000,000 90,000 3 4,500,000 185,000 4 5,000,000 220,000 Funeral Expenses 6. Answers: Funeral Expenses 7. o Funeral expenses shall consist of the following o Internment and/or cremation fees o Mourning apparel of the surviving spouse and unmarried minor children of the deceased bought and used on the occasion of the burial o Expenses for the decedents wake, including food and drinks before the burial o Fees and charges for the rites and ceremonies incident to the burial o Expenses for the death notices published, telegrams and cable grams sent to the relatives of the deceased; and o Cost of the burial lot, tombstone or monument but not their upkeep. In case it is a family lot, the lot of the deceased shall only be deductible. Funeral Expenses 8. Example. Chit Sharons gross estate is P3,000,000. Her executor is claiming the following as funeral expenses related to the death of Chit: Hospitalization incurred during the last 3 months prior to Chits death P50,000 Burial lot, 20% are paid from friends contribution 50,000 Expenses for wake before burial 20,000 Thank you cards to the sympathizers 2,000 Telegrams and cables sent to the relatives 1,000 Mourning apparel of the surviving spouse and children 3,000 Mourning apparel of the relatives 1,000 Entertainment expenses during the rites and ceremonies during burial 2,500 How much is the allowable funeral expense? Funeral Expenses 9. Burial lot (P50,000 x 80%) P40,000 Expenses for wake before burial 20,000 Telegrams and cable to relatives 1,000 Mourning apparel of the surviving spouse and children 3,000 Entertainment expenses during the rites and burial ceremonies 2,500 Allowable funeral expenses P66,500 Answer: Funeral Expenses 10. Judicial expenses oAre allowed deductions incurred for the administration, inventory taking of assets, and settlement of the estate. oTo be deductible, judicial expenses should be incurred during the settlement of estate but not beyond the last day prescribed by law, or the extension thereof, for the filing of the estate tax return. 11. include Fees of executor or administrator Attorneys fee Court fees Accountant fees Appraisers fees Clerk hire Costs of preserving and distributing the estate Costs of storing or maintaining property of the estate and Brokerage fees for selling property of the estate. Judicial expenses 12. oExpenses not essential to the proper settlement of the estate but incurred for the individual benefit of the heirs, legatees, or devisees are not allowed as deductions. Thus, the following are not allowed as deductions: o Attorneys fees incident to litigation incurred by the heirs in asserting their respective rights or claims as to who are entitled to the estate left by the deceased; o Premiums paid by a judicial administrator on his bond are not deductible because the ability of the appointee to give bond in in the nature of a qualification o Compensation of trustees such expenses being for the account and benefit not of the estate but of the beneficiaries. Judicial expenses 13. Example. Malakas and Maganda had a disagreement in the sharing of inheritance of the estate of their parents. The disagreement prompted both parties to bring the matter to the court. Both of them incurred and paid attorneys fees incident to litigation. a.Are the expenses borne by the opposing parties deductible from gross estate under judicial expenses? Answer: No Judicial expenses 14. Casualty losses oAll losses incurred during the settlement of the estate arising from theft, robbery embezzlement, fire, shipwrecks, storms and other calamities. oCasualty losses can be claimed as long as: the amount of loss is not compensated for by any insurance or extra judicial settlement; and oThey have not been claimed as deduction from gross income for purposes of income tax computation. 15. Claims against the estate oPertains to debts which are properly chargeable and enforceable against the estate. oTo be deductible, the following requisites must be complied oThe liability represents a personal obligation of the deceased existing at the time of his death except unpaid obligations incurred incident to his death such as unpaid funeral expenses and unpaid medical expenses. oThat the liability was contracted in good faith and for an adequate and full consideration in money or moneys worth oThe claim must be a debt or claim which is valid in law and enforceable in court oThe indebtedness must not have been condoned by the creditor or the action to collect from the decedent must not have prescribed. 16. Example. Doris borrowed P50,000 from her friend, Sabel. Before indebtedness was paid, Doris died. a.Is the unpaid obligation deductible from the gross estate of Doris? b.How about if its deductibility would leave nothing to be distributed among the heirs? c.How about if Sabel decides to condone the debt? ANSWERS: YES; YES; NO Claims against the estate 17. A requisite for its deductibility is that the value of the decedents interest therein is included in the value of the gross estate and that the debtors are incapable of paying their indebtedness. Claims against Insolvent Person 18. Example. Bolalin borrowed P150,000 from Arturo. After a month, the debtor paid P50,000. before the remaining balance of P100,000 was paid, Arturo died. Prior to his death, the court declared Bolalin insolvent. The total assets and total liabilities of the debtor amount to P200,000 and P500,000, respectively. How much bad debt is deductible from the estate of Arturo? Remaining debt of Bolalin P100,000 Less: Recoverable amount (2/5 x P100k) 40,000 Amount deductible P 60,000 Claims against Insolvent Person 19. Unpaid Mortgages oThese are unpaid indebtedness or loans secured by debtors property, contracted in good faith and for an adequate and full consideration in money or moneys worth. oTo be deductible, the property mortgaged must be part of the gross estate at FMV. 20. Unpaid taxes Refer to taxes incurred prior to the date of the decedents death and remained unpaid as of the date of death. DEATH Before Deductible After Non-deductible 21. SEATWORK: (1/2 CW) 4-5 4-10 TO 4-19 #DO IT INDIVIDUALLY #SHOW YOUR SOLUTIONS #WRITE THE LETTER AND THE ANSWER OF YOUR CHOICE

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