Income Tax on Individuals

Income Tax Overview

  • Income Tax: Tax on a person's income, profits from property, practice of profession, trade, or business. Determined based on gross income less deductions as stated in the Tax Code.

Definition of Important Terms

  • Person: Includes individuals, trusts, estates, corporations.

    • Individual: A natural person.

    • Trust: Fiduciary arrangement for holding assets for beneficiaries.

    • Estate: All property and money owned by a person.

    • Corporation: Includes single-person corporations, partnerships, joint-stock companies but excludes certain types under special laws.

Classification of Individuals

  • Citizens: Residents vs. Non-residents.

    • Resident Citizens: Filipinos residing in the Philippines.

    • Non-Resident Citizens: Those residing abroad with intentions or previously considered non-residents.

    • Resident Aliens: Non-citizens living in the Philippines without a fixed intention to reside permanently.

    • Non-Resident Aliens: Those either engaged or not in trade/business in the Philippines.

Taxability of Individuals

Classification

Taxable Income

Resident Citizens

Both earned in and out of the country

Non-resident Citizens

Only income earned in the Philippines

Resident Aliens

Both earned in and out of the country

Non-Resident Aliens

Engaged in trade/business: in (earned in Philippines)

Not Engaged in trade/business: out (based on gross income)

Types of Income Earners

  • Pure Compensation Income Earners

  • Pure Self-Employed/Professional Income Earners

  • Mixed Income Earners

Types of Income and Tax Rates

  • Basic Income Tax: 0% to 35% (Progressive)

  • Optional Gross Receipt Tax: Flat rate of 8% for eligible individuals.

  • Capital Gains Tax: Varies based on type of asset sold.

Classification of Taxpayer’s Properties

  • Ordinary Assets: Used in business.

  • Capital Assets: Everything else.

Capital Gains Tax (CGT)

A. Sale of Shares of Stock Not Traded in the Stock Exchange

  • Final tax rate: 15% on net gains above P250,000.

    • Income Tax Brackets:

    • P250,000: 0%

    • P400,000: 15% on excess

    • P800,000: P22,500 + 20% on excess

    • And more, increasing rates up to 35% for high incomes.

B. Sale of Real Property

  • Final tax rate: 6% based on gross selling price or fair market value, whichever is higher.

    • Exemptions available, especially for the sale of a principal residence under certain conditions.

Final Withholding Tax

  • Passive Income Tax Types: Interest, royalties, dividends, prizes, and winnings.

  • Final Withholding Tax: Tax withheld is the final tax liability.

  • Withholding Tax on Compensation: A compulsory deduction from employee's salary.

Withholding Tax Rates

  • Daily, Weekly, Semi-Monthly, Monthly Rates vary according to salary range. For example:

    • Daily: ₱685 and below = 0%

    • Above ₱21,918 = +35% over ₱21,918

De Minimis Benefits

  • Exemptions on minor compensations (e.g., Rice subsidy, Medical cash allowances).

Examples:

  • Benefits up to P90,000 exempt,

  • MORE THAN P10,000 is fully taxable.

Fringe Benefits Tax (FBT)

  • FBT Rate: 35% on the grossed-up value of fringe benefits provided to managerial and supervisory employees, payable by the employer.

Reporting Responsibilities and Deadlines

  • Various BIR forms for capital gains tax, withholding tax, compensation must be submitted within specified deadlines.

Discussion Problems Examples

  • Determine capital gains tax based on given selling prices, assessed values, and acquisition costs.

  • Compute taxable net income from various business and rental activities, taking into account gains and capital losses.

Study Tips

  • Understand the differences between residence types and their respective tax obligations.

  • Memorize key terms and their definitions.

  • Practice with problems that require calculations of taxable income and capital gains.

  • Keep updated on tax regulations, as they may change.