Taxation 2 │DEDUCTIONS FROM GROSS ESTATE

FLABERT VILLASENCIO, CPANotre Dame of Dadiangas University

ORDINARY

SPECIAL

ExpensesLosses

IndebtednessTaxes

Transfer for public useAmount received by heir under RA 4917Vanishing deductionsShare of surviving spouse

Funeral

Judicial Claims against the estate

Claims against insolvent person

Family homeMedical ExpensesStandard deduction

Transfer for Public Use

oAll bequests, legacies, devises or transfers to or for the use of the Philippine Government

oOther than the Philippine Government, NOT allowed as deduction

oMust be through TESTAMENTARY succession

oDeductible from exclusive portion of the estate; otherwise it is conjugal (must have written consent of the other spouse)

oDeemed to have been done by the husband alone; otherwise there should be express stipulation that the wife joins the donation

oIf silent, it should be taken as an exclusive property

Vanishing Deduction

oTo lessen the burden of paying tax due to the short period of property transfers by reason of early deaths

oSame Property must be included in the gross estate

oTo be deductible:o Present decedent died within 5 years from the receipt

of property through gratuitous transfero The property involve is within the Philippineso Tax must have been actually been paid for such

propertyo It must came from a prior decedento No similar deduction must have been allowed to prior

decedent

Vanishing Deduction

oRate of Vanishing Deduction

100% - if within 1 year

80% - if > 1 year to 2 years

60% - if > 2 years to 3 years

40% - if > 3 years to 4 years

20% - if > 4 years to 5 years

Vanishing DeductionoComputation of Vanishing Deduction

1.Value to be taken- previous transfer vs present (Lower)

2.Initial Basis- Value taken less mortgage paid

3.Proportionate Deduction from Initial Basis

= ELIT + TPU x (Initial Basis / Gross Estate)

4.Basis of Vanishing DeductionInitial Basis less: Proportionate Deduction

5.Percentage of Deduction Level

Vanishing Deduction

Illustration:

Gina Dan, died on Oct 21, 2013 leaving a parcel of land which she inherited from her mother, Pina G.A Dan who died May 20, 2010. The value of the property at the time of death of her mother was 350,000 but it appreciated to 475,000 in 2013.

The gross estate, deductions and other data consisted of the following:

Vanishing Deduction

Illustration:Community Property 950,000Exclusive Properties 650,000Funeral Expenses 40,000Judicial Expenses 25,000Medical Expenses 15,000Bequests to Phil Govt 10,000Claims against the Estate 15,000

At the time of death of Pina, the parcel of land had an unpaid mortgage of 50,000 of which 20,000 was paid by Gina.

Vanishing DeductionIllustration:Solution:Value in estate of prior decedent 350,000Value in estate of present decedent 475,0001. Lower Value 350,000Less: Mortgage 20,0002.Initial Basi 330,000Less: Deductions (Pro-rated) Funeral Exp 40,000 Judicial Exp 25,000 Transfer for Pub Use 10,000 Claims against Estate 15,000 Unpaid Mortgage 30,000

Total 120,0003. Deductible (330,000/1,600,000 x 120,000) 24,7504. Base 305,2505. Rate (More than 3 years to 4 years) 40 % oVANISHING DEDUCTION 122,100

SEATWORK: (1/2

CW)4-20 TO 4-30

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