Inctax inclusion

• EXCLUSIONS AND INCLUSIONS FROM GROSS INCOME
• Members


  • Caragatan, Annabelle
  • Dequilla, Khryzyl Bray
  • Gamarcha, Kiah Mae
  • Ortega, Krystel
  • Palarion, Bea Kristel Jane
• Exclusions from gross income

  Income which will not be subject to income tax. They are not included in gross income subject to regular tax, capital gains tax, or final tax.

  
• Exclusions from gross income under Sec. 32(B) of the NIRC


  • Proceeds of life insurance policy
  • Amount received by the insured as a return of premium
  • Gifts, bequest, and devises or decent
  • Compensation for injuries and sickness
  • Income exempt under treaty
  • Retirements benefits, pensions, gratuities, and others benefits
  • Miscellaneous items
• Proceeds of life insurance policies


  Paid to the heirs or beneficiaries upon the death of insured, whether in a single sum or otherwise. If such accounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. Life is regarded as a capital item with infinite value. Hence, the proceeds of life insurance is a return capital.
• Amount received by the insured as a return of premium


  The amount received by the insured as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. The amount received by the insured as a return of premium on any insurance contract is a return of capital; hence, it is excluded from gross income.
• Life insurance contracts


  • Alberto is insured in a P1,000,000 life insurance policy with annual premium payments of P20,000 for 10 years. If Alberto outlives the policy after the 10th year, he will be paid a P500,000 maturity value. Scenario: Alberto died on the 8th year of coverage and his heirs collected the P1,000,000 proceeds. The entire insurance proceeds of P1,000,000 is not taxable.
• Property insurance contracts


  The proceeds of property insurance contracts in excess of the tax basis of the property lost or destroyed is a taxable return on capital.
• Property insurance contracts


  • Aztraneca Company secured a fire insurance covering the entire P2,000,000 fair value of it's office building. The building was completely destroyed by fire when the depreciated cost (tax basis) of the building was P1,800,000. Aztraneca recovered the P2,000,000 insurance proceeds. The total proceeds shall be analyzed as follows: Total proceeds P2,000,000, Less: Basis of property destroyed (return of capital) P1,800,000, Return of capital (item of gross income) P200,000
• Gifts, bequest, and devises or decent


  The value of property acquired by gift, bequests, devise, or decent: Provided, however, that income from any property, in cases of transfers of divided interest, shall be included in gross income.

  
• Gifts


  • Juan received a restaurant business as a gift on April 1, 2024. On that date, the restaurant had total properties amounting to P400,000 including P50,000 cash income earned since January 1, 2024. The restaurant posted an additional P150,000 cash income from April 1 to December 31, 2024. The transfer of business properties worth P400,000 to Juan is a gratuity subject to transfer tax, not income tax. However, the P50,000 donated income shall be included in gross income, but in the income tax return of the donor. The P150,000 income of the donated property after the perfection of the donation is included as item of gross income in the tax return of Juan, the donee.
• Gift distinguish from exchange


  The transferor's intention or motive must be evaluated in determining whether a transfer is a gift or an exchange. Gifts are characterized by pure liberality or disinterested generosity and are given without any consideration. An exchange always involves a consideration.
• Employment gratuities


  Gratuities given under an employer - employee relationship are normally treated in exchange for services rendered by employees. Hence, they are subject to income tax. The transfer of properties by the employer to managerial or supervisor employees is generally subject to fringe benefit tax. Christmas or major anniversary gifts granted by the employer to employees are de minimis benefits subject to income tax.
• Compensation for injuries and sickness


  The amount received through accident or health insurance or under Workmen's Compensation acts as compensation for personal injuries or sickness, plus the amount of any damages received, whether by suit or agreement, on account of such injuries or sickness.
• Compensation for injuries and sickness


  • Mr. Vivid was hit by a jeepney. He paid P100,000 for hospitalization expenses. He sued the jeepney driver and was awarded by the court a total indemnity of P340,000 divided as follows: P200,000 indemnity for his pain, anguish and sufferings, P40,000 for his lost salaries, and P100,000 as reimbursement for his hospital bills. The P200,000 indemnity and P100,000 reimbursement for hospitalization expenses are non-taxable returns for capital. Note that health is a capital item with infinite value. However, the 40,000 reimbursement for lost salary is a recovery of a lost profit; hence, an item of gross income.
• Income exempt under treaty


  Income items that are excluded by international agreement to which the Philippine government is a signatory are excluded from income tax. It must be recalled that treaty agreements override provisions of our venue tax laws in case of conflict under the exemption doctrine of international comity.

  
• Retirements benefits, pensions, gratuities, and others benefits

  • Retirement benefits under RA. 7641 and those receive by officials and employees of private firms in accordance with a reasonable private benefit plan maintained by the employer
  • Retirement benefit under RA. 7641 received by officials and employees in the absence of a retirement plan
  • Separation or Termination
  • Social Security Benefits, Requirement Gratuities, and other similar benefits from foreign government agencies and other institution, private or public, received by resident or non-resident citizens or aliens who come to settle permanently in the Philippines
  • United States Veterans Administration (USVA) - administered benefits under the laws of United States received by any person residing in the Philippines
  • Social Security System (SSS) benefits under RA 8282
  • GSIS benefits under RA 8291 including retirement gratuity received by government officials and employees
• Retirement benefits under RA. 7641 and those receive by officials and employees of private firms in accordance with a reasonable private benefit plan maintained by the employer


  Requisites of exemption: (Mnemonic:10-50RPBP) a. This is the first time availment of retirement benefits exemption. b. The retiring official or employee has been in the services of the same employer for at least ten (10) years. c. The retiring employees is at least fifty (50) years of age at the time of retirement. d. The Employer maintains a reasonable private benefits plan. A reasonable private benefits plan means a pension, gratuity, stock bonus, or profit-sharing plan maintained by an employer for the benefits of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for executive benefits of the said officials and employees. To be exempt, the retirement benefit plan must be "trusted" plan where the fund is held under the management of a trustee free from both employer and employees control. The 10-year service period requirement pertains to cumulative years of employment with the same employer. It does not need to be continuous years of employment. A requirement for continuous employment would be prejudicial to working women.
• Retirement benefits under RA. 7641 and those receive by officials and employees of private firms in accordance with a reasonable private benefit plan maintained by the employer


  • Mrs. Estrella was employed in 2000 when she was 25 years old. In 2021, she availed of the early retirement program of her employer. Mrs. Estrella satisfied the 10-years cumulative employee requirement but she is only 45 years old (ie. 25+(2021-2000) at the time of her retirement. The retirement benefits is taxable. It is an inclusion in gross income as compensation income. Assume that Mrs. Estrella joined another employer and worked therein for 7 more years after which she retired from her employment. Although, Mrs. Estrella is 50 years old by then, she is only seven years under the employment of her second employee. The second retirement benefit is also taxable as compensation income since she failed the residency requirement.
• Retirement benefit under RA. 7641 received by officials and employees in the absence of a retirement plan


  Requisites of exemption: a. The retirement employee is at least 60 years of age b. He must have served the employer for at least 5 years. Note that these examination criteria apply also in cases where the retirement plan is not approved by the BIR.
• Separation or Termination


  Requisite of exemption: 1. The separation or termination must be due to job-threatening sickness, deaths, or other physical disability; and 2. The same must be due to any cause beyond the control of the employee or official such as; a. Redundancy b. Retrenchment c. Closure of employer's business d. Employee lay-off e. Downsizing of employer's business f. Sickness or death of the employee. The phrase "beyond the control of the employee" connotes involuntariness on the park of the employee. In other words, the separation must not be of his own making. Abandonment of office such as the registration and subsequent appointment to another office is considered as a voluntary separation and does not fall within the preview of the phrase "for any cause beyond the control of such officials or employee" (BIR Ruling 054-2001). The exemption of termination or separation benefits does not extend to: 1. Backwages or illegal deductions repaid by the employer upon termination (BIR Ruling 003-2004) 2. Terminal leave pay or the communication of accumulated unused leave credits (BIR Ruling No. 199-2011). To avail of the tax exemption, in the employee or his heirs shall request for a rulling or certificate of exemption (CTE) from the BIR. The request for a CTE and other required documents shall be filled at the RDO where the employer is registered.
• Separation or Termination


  • Clarence's employer was downsizing it's business operations. Clarence was identified among others to be laid off. To avoid implications of inefficiencies on his part, Clarence filled a resignation letter to the company and received a seperation pay of P120,000. The separation pay is taxable as a compensation income since the underlying reason of the severance of the employment (i.e, resignation) is within the control of the employee. If Clarence got terminated without resigning, the separation pay would be exempt. Eman was diagnosed to have a sexually transmitted disease (STD). Due to this, his employer decided to terminate his services but granted him P1,000,000 separation pay. The P1,000,000 separation pay is taxable as STD does not normally render the employee incapable of working.
• Miscellaneous items excluded from gross income


  • Income derived from investments in the Philippines in loans, stocks, bonds, or other domestics securities, or from interest on deposits in banks in the Philippines by: a. Foreign governments b. Financing institution owned, controlled, or enjoying refinancing from foreign government c. International or regional financial institutions established by foreign governments
  • Income derived by the government and it's political subdivisions from: a. Any public utility or b. Exercise of essential government function
  • Prizes and Awards made primarily in recognition of religious, charitable, scientific, education, artistic, literary, or civic achievements but only if: a. The recipient was selected without any action on his part to enter the contest or proceeding; and b. The recipient is not required to render the substantial future services as a condition to receiving the price or award
  • Prizes and Awards in Sports Competition granted to athletes: a. In local or international competitions and tournaments; b. Whether held in the Philippines or abroad; and c. Sanctioned by their national sports associations
  • Contribution by GSIS, SSS, PhilHealth, Pa

  
• Prizes


  Partake the nature of a unilateral transfer and hence, exempt from income tax
• Prizes are also exempt by law from transfer tax
• Prizes


  If the recipient exerted effort for the grant of the prize such as joining a contest or is required to render the service for its grant, the prize would be construed as received in an exchange and hence, taxable as income
• Exempt prizes


  • Nobel Prize award
  • Gawad ng Sising Award
  • CNN Hero of the Year
  • Most Outstanding Citizen
• Prizes and Awards in Sports Competition granted to athletes

  • In local or international competitions and tournaments
  • Whether held in the Philippines or abroad
  • Sanctioned by their national sports associations

  
• Contributions by GSIS, SSS, PhilHealth, Pag-Ibig and Union dues of individuals

  The portion of the salary thus contributed is exempt from income tax
• Under RMC No. 21-2011, the exclusion pertains only to the mandatory or compulsory monthly contributions
• Voluntary contributions to Pag-Ibig II, GSIS or SSS in excess of the mandatory monthly contribution are taxable
• Pag-Ibig is now called the Home Development Mutual Fund or HDMF
• Computation of gross taxable compensation income


  1. Gross compensation income

  2. Less: Excluded compensation income or contributions (SSS, PhilHealth, HDMF, Union dues)

  3. Gross taxable compensation income

  
• Employer's Contributions to Personal Equity Retirement Account (PERA)


  PERA is a contributor's voluntary retirement account established from qualified contributions of the contributor and or his employer for the sole purpose of being invested in qualified PERA investment products
• Overseas Filipino Worker's (OFWs) are allowed to contribute up to P20,000 per year to a PERA account
• Non-OFWs are allowed P100,000 contributions per year
• Husband and wife can each contribute up to the maximum allowable contribution
• Employer's Contributions to employee's PERA


  They are exclusive to a gross income of the employee to the extent of the amount that would complete the maximum allowable contribution
• The PERA contributor's are allowed to claim 5% of their PERA contributions as tax credit against any internal revenue taxes
• Effects of PERA contributions


  1. To the employer: Can claim as deduction only up to the maximum allowable contribution less employee contribution, Cannot claim the PERA tax credit on its contribution

  2. To the employee: The employer's PERA contribution is exclusion in the employee's gross income, The employee's PERA contribution is an inclusion in gross income but he can claim 5% as tax credit