Chapter 6
Taxation of Individuals
Classification of Individual
Taxpayers
• Resident Citizen
• Non-Resident Citizen
• Resident Alien
• Nonresident Alien
Resident Citizen
• An individual whose residence is within the Philippines
and who is a citizen thereof.
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 during the taxable year;
d.)A citizen who has been previously considered as
nonresident 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 non-resident citizenshop 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
Resident Alien
• Means any individual whose residence is within the
Philippines and who is not a citizen thereof
Nonresident Alien
• Means an individual whose residence is not within the
Philippines and who is not a citizen thereof. A
nonresidence alien is further classified into:
a.) Engaged in trade or business in the Philippines; or
b.) Not engaged in trade or business in the Philippines
Tax on income earnings and
money remittances of
OCW/OFW
• OCW – refer to Filipino citizens employed in foreign
countries, commonly referred to as OFW’s, who are
physically present in foreign country as a consequences
of their employment treat.
• Its only taxable on income from sources within the
Philippines. Thus, as OCW or OFW’s income arising out
of his employment is exempt from income tax.
What are Senior Citizens?
• It refers to any resident Filipino citizen aged 60 years
old and above.
CHARACTERISTIC OF THE REGULAR
INCOME TAX
• General in coverage
• A net income tax
• An annual tax
• Creditable withholding tax
• Progressive or proportional tax
General Coverage
The regular income tax applies to all items of taxable
income except those that are subject to:
1. final tax
2. capital gains tax
3. special tax regimes
Net Income Taxation
The regular tax is an imposition on residual profits or
gains after deductions for expenses and personal
exemptions allowable by law.
Annual Income tax
The regular income tax applies on yearly profits or gains.
The gross income and expenses of the taxpayer are
measured using the accounting methods adopted by the
taxpayer and are reported to the government over the
accounting period selected by the taxpayer.
Creditable withholding taxes
Most items of regular income are subject to creditable
tax (CWT). These creditable withholding taxes are
advanced taxes that must be deducted against regular
tax due in computing the tax still due to the
government.
Progressive or Proportional tax
The NIRC imposes a progressive tax on the taxable
income of individuals while it imposes a flat or
proportional tax at 25% upon the taxable income of
corporations.
THE REGULAR INCOME TAX MODEL
Gross income - inclusions P xxx,xxx
Less: Allowable deductions xxx,xxx
Taxable inome P xx,xxx
vvvvvvvv
Gross income consists of the major topics:
1. Exclusions of gross income - list of income exempt to
regular income tax
2. Inclusions in gross income - list of income subject to
regular income tax
3. Special topics - covers income tax that are either
exclusion or inclusion depending on
certain circumstances, such as:
a. Fringe benefits
b. Dealings in properties
Kinds of income of Individual
taxpayer
• Compensation income – income arising from personal
service under an employer-employee relationship,
whether it takes the form of salaries, honoraria,
bonuses, pensions, allowances, representation fees,
and other similar incomes, whether paid in cash or in
kind.
• Business or professional income – income earned by an
individual from the sole proprietorship business or from
the practice of his profession.
• Passive income – income earned which are subject to
different final withholding tax rates.
Treatment of other income
Income that are neither compensation income nor
business income such as those passive income are
simply classified as “Other Taxable Income” and are
added to gross income from business or profession as
“Non-operating income”. If the taxpayer has no
business or professional income, the same shall be
added to taxable compensation income as “other
income”.
Change of status
• This status may change during the year but the
corresponding amount of personal exemptions will not change
• The rules on change of status:
a.) If the taxpayer married or should have additional
dependent, the taxpayer may claim the corresponding
additional exemption in full for such year;
b.) If the taxpayer dies during the taxable year, his estate
may still claim the personal or additional exemptions for
himself and his dependent as if he died at the close of such
year;
c.) If the spouse or any of the dependents dies or if any of
such dependents marries, becomes 21 years old or becomes
gainfully employed during the taxable year, the taxpayer may
still claim the same exemptions as if the spouse or any of the
dependents died, or as if such dependents married, became
21 years old or became gainfully employed at the close of
such year.
Allowable Deductions
Business expenses are deducted against gross income
from business or profession. No deduction is allowed
against compensation income since personal expenses
of individuals for cost of living are deemed to be
included in the P250,000 blanket exemption in the
income tax table.
Allowable deductions from income
of individuals taxpayers
• The deductions allowed shall depend on the nature of
income earned by the taxpayer;
a.) Compensation income – General Rule: P250,000
income is exempt from tax.
b.) Business/professional – itemized deductions such as
expenses, interest, taxes, losses, bad debts,
depreciation, depletion, charitable and other
contributions, research and development and pension
trust.
Taxable income of pure
compensation income earner
Gross ompensation income P xxx,xxx
Less: Non-taxable compensation xxx,xxx
Taxable income P xxx,xxx
vvvvvvvvv
Taxable income of pure business or
professional income earner
Gross income from business/profession P xxx,xxx
Add: Non-operating income xxx,xxx
Total gross income P
xxx,xxx
Less: Allowable deduction
xxx,xxx
Taxable net income P
xxx,xxx
vvvvvvvvv
Globalization rule for mixed income
earner
The income of mixed income earner from both sources is
simply globalized or totaled. A negative net income
or loss when deductions exceed gross income from
business or profession shall not be offset against
taxable compensation income because deduction are
expenses of business or profession and are properly
deductible only against gross income thereto, whereas
no expense is deductible against taxable compensation
income.
Illustration: Individual income
taxpayer
Case 1 Case 2 Case 3 Case 4
Compensation
income P 300,000 P 300,000 P 300,000
Non-Taxable
income 30,000 30,000 30,000
Gross business
income 400,000 400,000 200,000
Deductions 250,000 250,000 250,000
Other income P 20,000 20.000 20,000 20,000
Taxable income shall be determined in each of the above
case as follows:
Case 1 : A compensation earner with other income
Gross compensation income P 300,000
Less: Non-taxable compensation 30,000
Taxable compensation income P 270,000
Add: Other gross income 20,000
Taxable income P 290,000
vvvvvvvvv
Taxable income shall be determined in each of the above
case as follows:
Case 2: A business income earner with other income
Gross compensation income P 400,000
Add: Other gross income 20,000
Taxable compensation income P 420,000
Less: Allowable deduction 250,000
Taxable income P 170,000
vvvvvvvvv
Taxable income shall be determined in each of the above case as
follows:
Case 3 : A mixed income earner with other income
Gross compensation income P 300,000
Less: Non-taxable compensation 30,000
Taxable compensation income P 270,000
Gross business income P 400,000
Add: Other gross income 20,000
Total gross income P 420,000
Less: Deductions 250,000
Taxable income P 170,000
Taxable income P 440,000
vvvvvvvvv
Taxable income shall be determined in each of the above case as follows:
Case 4 : A mixed income earner with net loss on business or profession
Gross compensation income P 300,000
Less: Non-taxable compensation 30,000
Taxable compensation income P 270,000
Gross business income P 400,000
Add: Other gross income 20,000
Total gross income P 420,000
Less: Deductions 250,000
Net Loss (P 30,000) ________
Taxable income P 270,000
vvvvvvvvv
NOTE: A net loss may be carried over as a deduction against net
income of the succeeding three years. This is referred to as net
operating loss carry-over or (NOLCO). This will be discussed under
another Chapter.
