Deductions are the amounts or items th ss estate to arrive at net estate 8 that the law allows to be deducted from gros ‘The burden of proot to establish the validity of claimed deductions i on the axpayer. He must point to some specific provisions of the statute in which that pamion is authorized, and must be able to prove that he is entitied to the ‘geduction which the law allows (1955 PH. Tax Course). The deductions from gross estate should be grouped into: 1. Those allowed Ifthe decedent was a resident or citizen; and » Those allowed f the decedent was a nonresident alien. On deaths that occurred January 3, 2018 onward the following tems shall be allowed as deductions from the gross estate: A. Deductions of residents or citizens Deductions allowed from the estate of a citizen ora resident in the case of a citizen or resident of the Philippines, the value of the net estate shall be determined by deducting from the value of the gross estate the following: |. ORDINARY DEDUCTIONS A. CUCUL 4. Claims against the estate 2. Unpaid mortgages 3, Claims of the decedent against insolvent persons 4. Unpaid taxes 5. Losses B. Transfers for public use C. Vanishing deductions (Property Previously Taxed) I. SPECIAL DEDUCTIONS A, Family home 8. Standard deduction of P5,000,000 ©. Amount received by heirs under RA 497 lil. SHARE OF SURVIVING SPOUSE IN THE CONJUGAL / COMMUNITY PROPERTIESClaims against the estate demands of 2 ‘The word “claims” is generally construed 10 mene debts © t during his pecuniary nature which could have been renforced against the deceden Ifetime and could have been reduced to simple money judgments: : nforceable against the These are debts which are properly chargeable and ¢' nay arise out estate. Claims against the estate or indebtedness in respect OF property of: (2) contract {2} tort, or (3) operation of law To be deductible, the following requisites must be complied, ViZ> of the deceased existing at the time a. The liability represents 2 personal obligation of his death; b, That the liability was contracted i” good faith and for an adequate and full consideration in money or money's worth ss valid in law and enforceable in court; ¢. The claim must be a debt or claim which i d. The indebtedness must not nave been condoned by the creditor, or the action to collect from the ‘decedent must not have prescribed. Substantiation requirements A. Incase of simple joans 1, The debt instrument must he duly notarized at the time the indebtedness was incurred, such as promissory notes or contract of loan, except for loans granted by financial institutions where notarization is not part of the business practice/palicy of the financial institution-lender. 2. Duly notarized Certification from the creditor as to the unpaid balance of the debt, including interest as of the time of death. If the creditor is a - id . isa a. Corporation - the sworn certificati arora ification should be sig i Vice-President, or other principal officer of the porter ie meee b. Partnership - the 5 hate ip sworn certification should be signed by any of the general mnee, ¢. Bonk or other financial institutions - the certification shall be executed by the branch manager of the bank/financial institution which monitors and manages the loan of the decedent-debtor, d. Individual - the sworn certification should be signed by him. In any of these cases, the one who should certify must not be a relative of the borrower within the fourth (4) civil degree, either by consanguinity or affinity, except when the requirement below is complied with. ‘When the fender, or the President/Vice-President/principal officer of the creditor-corporation, or the general partner of the creditor-partnership is a 4° degree relative of the debtor, a copy of the promissory note or other evidence of the indebtedness must be filed with the Revenue District Office (RDO) having jurisdiction over the borrower within fifteen (15) days from the execution thereof, 3. Proof of financial capacity of the creditor to le loan was granted, as well as its latest audited balance sheet with a detailed schedule of its receivable showing the unpaid balance of the decedent debtor. a. In case the creditor is an individual who is no longer required to file income laration by the creditor of his tax returns with the BIR, a duly notarized Decl: capacity to lend at the time when the loan was granted without prejudice to verification that may be made by the Bureau of internal Revenue {BIR) to substantiate such declaration of the creditor. n-resident, the executor/administrator or any of the legal heirs must submit a duly notarized declaration by the creditor of his capacity to lend at the time when the loan was granted, authenticated or certified to as such by the tax authority of the country where the non- resident creditor is 2 resident. 4. Astatement under oath must be executed by the administrator or executor of the estate reflecting the disposition of the proceeds of the loan if said loan was contracted within three (3) years prior to the death of the decedent. nd the amount at the time the If the creditor is a no! = B. if the unpaid obligation arase from purchase of goods or services: 1. Pertinent documents evidencing the purchase of goods or service, such as sales invoice/delivery receipt (for sale of goods), or contract for the services agreed to be rendered (for sale of service), as duly acknowledged, executed 7 and signed by the decedent debtor and creditor, and statement of account given by the creditor as duly received by the decedent debtor;2. Duly notarized certification from the creditor as to the unpaid balance of the debt, including interest as of the time of death. Be coenps Moreover, the requirements in A (2) (a, b and d) above must be complied with. .€ Where the settlement is made through the Court in a testate a cate proceeding, pertinent documents filed with the Court evidi eee if alreat against the estate, and the Court Order approving the said Ga c clin dy, issued, in addition to the documents mentioned in the preceding paraBrapns. Mtlustration 7 - 1 Manuba borrowed P50,000 from: her’ sister, Malatc. Before the indebtedness was paid, Manuba died. = a 1. {sthe unpaid obligation deductible from the gross estate of Manuba? a Yes, it is a deductible item falling under “claims against the estate" provided that the requirements of the law are complied with. How about if its deductibility would leave nothing to be distributed among the heirs? a It is still deductible. The rule provides that before an estate is distributed among the heirs, all lawful debts should first be paid. The following are considered as charges against the conjugal partnership or the community property of the spouses, lee and therefore they are eit! iT community property deductions: ny are: ef her conjugal or a. All debts and obligations contracter ee d during the marri i administrator-spouse for the benefit of the el me we oe ‘one spouse with the consent of the other. or’by both spouses, or by tb, Debts and obligation: 's contracted by eith other to the extent thatthe family may have! been be atic a ¢, Ante-nuptial debt: nefited; of the family, of either spouse insofar as they have redounded to the benefitlois against insolvent persons insolvency ts the state of not being ai ble insufficient assets to pay all debts, 18 able to pay the money owed because of Those in the state of Insolvency are said to be insolvent. (One important requisite for its deductibility is that the value of the decedent's interest therein is cae’ in the value of the gross estate (Sec. 86[d], NIRC) and that the debtors are incapable of paying their indebted: saan iness (Monserrat vs. Coll, CTA No. Dectaration of insolvency maybe either by: ‘1 Voluntary insolvency an insolvent debtor may apply to be-discharged from his debts and liabilities by filing a petition with court of competent jurisdiction. 2. Involuntary insolvency — a court petition filed by three or more creditors, against 2 debtor, whose credits accrued in the Philippines. Claims against the estate are distinguished from claims against insolvent persons as foliows! In the first, the decedent was the debtor, while in claims against insolvent persons, the decedent was the creditor at the time of his death. Claims against insolvent persons are otherwise known as "bad debts.” The amount of deduction is the value of indebtedness 2years 80%: 2 years 3 years 60% 3 years ‘years 40% 4 years’ 5 years 20% illustration 7-4 Gina Dan, died on October 21, 2019 leaving a parcel of land which she inherited from her mother, Pina G.A. Dan who died May 20,.2016. The value of the property at the time of death of her mother was P3,500,000, but if has appreciated to P4,750,000 in 2019. The gross estate, di T leductions and other data consisted of the following: . Community property : Fi ‘ . P9,500, Boca Propet Of the decedent 4 a ae ime on te SOvemMment for publi pose ay Claims against the estate were Sees oe 150,000 _— atthe time of death of Pina, the land had an jeqn000 oF which P200.000 wos pall by Gina. Unpaid morgage of REQUIRED: Compute the vanishing deduction. of vaive in estate of prior decedent °3,500,000.90 Valve in estate of present decedent 4,750,900, Lower value 3,500,000.00 Less: Morigage paid 200,000.00 Initial basis 3 3;300,000.06 Less; Deductions (pro-rated) Transfer for public purpose P100,000.00 Claims against the estate 150,000.00 Unpaid mortgage (500,000 - 200,000}. 300,000.00 Total 550,000.00 Deductible (3,300,000/1 6,000,000 x 550,000) - 113,437.50 Base 3,186,562.50 Rate (more than 3 years, but not more than 4 years) ___ 40% Vanishing deduction’ 1.274,625.00 a 1. The denominator of 16,000,000 represents the gross estaie which is the total of the community property ‘of P9,500,000 and the exclusive property of 6,500,000. 3. The holding period of the properly is computed as follows: Year Month Day 2019 10 2 2016 45 20 om a a In case an improvement on the inherited property was made by the present decedent prior to his death, or an accretion took place while the property. was in his Possession, the value of such improvement oF accretion shall be disregarded in determining the amount of vanishing deduction.te) ve (separa! Classification of vanishing deduction pus ne exces ing deduction is always chargeable aBaI0%" (gal The vanishing Mjent if the spouses Were under eke property of ae always classified as separate deduct ne prope re Ne, he gains. Thus, re under the absolute ere mun Scion te However, rae either chargeable agains dents en ee el eee ecm the exclusive property of th tere! rape Shssifeation ore subject property. It may the ification of oa : irae ora community property deductio cage. After a Year. Wustration 7-5 fore mam heri nis father before 17° inherited property from foe he sige mariod fo Carla. After three month: ied. et be ing deduction 2 i perty shail the vanishing COT gains’ Qi: To which property shal Ihe (gal parinershiP spouses were CS charged if the char inst the yeable agai | e vanishing deduction shall be chargecio® at excl sve Seanrel the decedent: This is ied cause the inherited ay is classified as an exclusive property of Jess. pro c ¢ te community of under the absolut it if the spouses were @2: How abou’ property regime? oF < The vanishing deduction would then be chargeable against the it i he property inherited nity property, because upon mariage 1 by Jess! has been reclassified as a community property of the spouses. Family home ‘The family home pertains to the dwellin, family reside, and the land on place to which whenever abse, ig house where the Spouses and their which it is situated (Art. 152, Family Code). It is the int for business or pleasure one still intends to Actual occupancy of the not be considered interrupted return. hoy ral ‘he constituted family ho readies an lot as the family residence shall in such cases as the temporary absence me due to travel or Studies or work abroad, etc.The family home may also be constituted ine tore ori ae by an unmarried head of a famity on It does not include the movables found the: Nienited .se and the lot on which the house is situated, eee oe For purposes of gross estate of the decedent, the bi , the basis shall be tf market value or zonal value of the family home, whichever is ener oan 3) a ‘The following are the conditions for allowance of family home as deduction: 1, The total value of the family home must be included as part of the gross estate. 2. It must be the actual residential home of the decedent and his family at the time: of death, as certified by the Barangay Captain of the locality where the family home is situated; 3, The amount deductible is the actual value as declared or included in the. gross estate, but not exceeding P10,000,000. For purposes of availing of a:family home deduction to the extent allowable, person may constitute only one family home. fustration 7-6 The assessor's value.of the family home at the time of death of Fat Tat is P10,200,000 while the zonal valve is P11,350,000. oo What vaiue of family home is to be included in-and deducted from the gross estate? OS The amount includible in ihe gross estate is the zonal value of P11,350,000 because it is higher than the current value. ‘= The family home deductible from the gross estate is P10,000,000 only because if is the maximum arnount allowed under the code. : If the family home is a conjugal or community property, the amount deductible is 5,675,000, the share of the decedent in such property. Standard deduction This is a fixed amount equ! automatically deductible and not subject to any valent to Five Million Pesos (P5,000,000) which is substantiation.independent from i This is.a separate and distinct Item of deduction which isi Other items (BIR Ruling 9-99). estate. The entire amount of P5,000,000 is deductible from the net Bibi ae : i Like family home and amounts received by the heirs unde ‘oses of allocating the the standard deduction is not a multiplier deduction for purp + €xpenses in the computation of vanishing deduction. Amount received by heirs under RA 4917 eirs of the decedent the h This is pertaining to benefits granted and received ad due to death of the from his employer, as a consequence of Se in the gross estate of the decedent. Provided, however, that such amount is inclu decedent. “ ( erty Share of surviving spouse in the conjugal/community prop it unity property as The share of the surviving spouse in the conjugal Sa ve ‘seas diminished by the obligations properly chargeable to. such pi " E from the gross estate. Wustration 7-7 : * The following data: pertains to a married decedent: Conjugal property P Sere Exclusive property is 2,200,001 Charges against conjugal property 850,000 Charges against exclusive property 600,000 How much is the deductible share of the surviving spouse? oS The amount deductible is P2,075,000, computed as follows: Conjugal property i P 5,000, Less: Conjugal deductions : a ae Net conjugal ao Multiply | by the share of decedent es ae (2 Deductible share of Surviving Spouse 2.075.000\ The conjugal deductions shall not i < inch in computing the share of the surviving pee, ns ey B. Deductions of non-resident aliens No deduction shall be allowed in the case of 2 nonresident alien unless the | executor, administrator, of anyone of the heirs, as the case may Bey includes in the tum the value at the time of his death of that part of his gross estate, not situated in the Philippines (Sec. 86 (D), MIRC). ° ‘The deductions allowed.are the same items which are deductible from the gross estate of residents or citizens, ‘except the special deductions such as the family ome and the amount received by heirs under RA 4917. Vanishing deductions and transfers for public use are allowed as deductions, provided that the property must be situated in the Philippines and in the case of the jatter, the donation must be given to the Philippine Government. ~ Ordinary deductions (CUCUL) such as claims against the estate, claims against insolvent persons, unpaid mortgages, unpaid taxes and losses, are allowed a5 deductions but shall be limited to the amount computed by the application of the following formula: Phil. Gross Estate, Qrginary deductions Total Gross Estate Table 1 The following table summarizes the rule on deductibility or non-deductibility of various items depending upon the residence and citizenship of the decedent. | Items of Deductio | 1+ Funeral expenses Not Deductible | - Not deductible Resident or Nonresident it jenoe S atea mee Se ductible 2. Judicial expenses Not basso Not det a4 ee se aS _ es — 3. Claims against the estat Claims against insolvent ersons; | Deductible Total GE Losses; Unpaid taxes; Unpaid i. Mortgages; ' pe gosta — 4. Vanishing deduction Deductible 2 Deductibi 5. Transfer for publicuse - Deductible ibe a dedui 6. Medical expenses Not Deductible | _ Not P > FZ ictible Not deductible | 7 RA4917 Dedu aa Deductil 8. Share of surviving spouse Deductible : 9. Family home Deductible °|- Not deductible 40. Standard deduction 4 Deductible: oe P5 million: P500,000 fustration 7-8 Cio Lu, Chinese residing in Wuhan, China, died on October 21, 2019. The following are the data concerning his properties: Properties: House in China P3,500,000 Condominium unit in Bonifacio Global City * : : 3,000,000 Shares of stock in Co Pia, q Chinese Corporation 2.600,000 Car registered in Ching “S00 000 Personal properties in the Philippi Sis . name of Cio Ly PPNES registered in the 1h 608 House in Wuhan Ci Inherit me Hallada on Daca’ yy, mle. fern Hs father, Var Deductions; 2,500,000 Funeral ¢; it + us Judicial exp, ees incured in China Pa NS from bank S€cured by 60, ¥ the condo unit 000 500,000unpaid mortgage on house in China Losses incurred on stocks trading with the Philippine ee stock Exchange, incumed ten days prior fo his death aims against Soo San, insolvent eo Medical expenses incurred before his death 00 : Compute th REGURED Seca 18 estate tax due on the estate of Cio lu (Deregara a” Condominium unit 3,000,000 Personal properties 7,000,000 Claims against Soo San, insolvent 80,000 Gross estate 3,080,000 Less: Deductions Ordinary Unpaid mortgage P 500,000 Bad debt 80,000 Total 580,000 Deductible (3,080,000/13,580.000) x 580,000 ~ { 131,546) Standard deduction 500,000) Net taxable estate 2,448,454 Estate tax rate o% Estate tax due 146.907 * Computation of total gross estate: = House, China 3,500,000 Condominium unit, Philippines 3,000,000 Shares of stocks, Chinese Corporation 2,600,000 Car, China 900,000. Personal properties, Philippines 1,000,000 House inherited from father 2,500,000 Claims against insolvent person 89.000 Total gross estate 13,580,000peated. within ; ies IOC Nonresident aliens are taxable only on proper the Philippines. t deductible in China is NO The unpaid mortgage on the house in Chin! : estate- because the house is not included in the gross ubject to ines are not § Properties situated outside the Philipp! vanishing deduction. i Hi. The ordinary deductions cre not allowed in fu!