Income Taxes of Estates & Trusts: Income Taxation 6Th Edition (By: Valencia & Roxas) Suggested Answers

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)
SUGGESTED ANSWERS
127
Chapter 14: Income Taxes of Estates & Trusts
CHAPTER 14
INCOME TAXES OF ESTATES & TRUSTS

Problem 14 1 TRUE OR FALSE
1. False P20,000
2. True
3. True
4. True
5. True
6. True
7. False It shall be in writing either as trust inter-vivos or through a will.
8. False A trustor is the person who establishes the trust, not the trustee.
9. True
10. True
11. True
12. True
Problem 14 2 TRUE OR FALSE
1. False A taxpayer is required to file ITR regardless of the result of business whether
there is income or loss; hence, the ITR of irrevocable trust should be filed if its income is
P20,000 and below.
2. True
3. True
4. True
5. False The income is taxable.
6. True
7. True
8. False special deduction related to amount distributed to beneficiary is not allowed
when a trust is administered in a foreign country. [Sec. 61 (C), NIRC]
9. True
10. False Since the trusts are irrevocable, their income should not be combined with the
income of the trustor.
Problem 14 3
1. B
2. C
3. A
4. D
5. B
6. A
7. A
8. B
9. D
10. C
11. C
128

SUGGESTED ANSWERS
Problem 14 4
D
Gross income
Less: OSD (P200,000)
Net income
Less: Basic personal exemption
Net taxable income
P200,000
80,000
P120,000
50,000
P70,000
The estate can deduct greater amount of deductions by using OSD. Section 35(C) of NIRC
provides that if the taxpayer dies during the taxable year, his estate may still claim personal and
additional exemptions for himself and his dependents.
In the given problem, Mrs. Ayugat can claim her basic personal exemption of P50,000 but she
cannot claim additional exemptions because her husband is the proper claimant of the
additional exemptions unless the husband waives his right or has no income taxable in the
Philippines.. [Sec. 79(F), NIRC]
Problem 14 5
Note: Since the requirement is tax savings, if is to be assumed that OSD shall be used to
determine the lower amount of tax.
Correction: Requirement 2 should be: of the estate of Mathais mother.
1.
Letter B
Gross business receipts of Mathais estate after death
Less: OSD (P400,000 x 40%)
Net income before personal exemption
Less: Absolute exemption
Net income subject to income tax
P400,000
160,000
P240,000
20,000
P220,000
It must be noted that the P400,000 represents the income of the estate after death. It does not
include the income before death. In this case, the applicable exemption would be P20,000
because the income of Mathai before his death could deduct the basic personal exemption of
P50,000.
2.
Not in the choices = P5,000

Income tax when no income of estate was distributed (Case 1 + Case 3)
(P59,000 + P8,500)
P 67,500
129

SUGGESTED ANSWERS
Less: Income tax when P150,000 of estates income was distributed

(Case 2 + Case 4) = (P35,000 + P27,500)
62,500
P 5,000
Tax savings
Supporting computations:
Gross business receipts
Distribution to the beneficiary
Balance
OSD 40%
Personal exemption
Net taxable income
Income tax for first bracket
Income tax on excess
Case 1: (P280,000 P250,000) x 30%
Case 2: (P190,000 P140,000) x 25%
Case 4: (160,000 140,000) x 25%
Total income taxes
Case 1
Case 2
Case 3
Case 4
500,000
.
500,000
(200,000)
300,000
(20,000)
280,000
500,000
(150,000)
350,000
(140,000)
210,000
(20,000)
190,000
200,000
.
200,000
(80,000)
120,000
(50,000)
70,000
200,000
150,000
350,000
(140,000)
210,000
(50,000)
160,000
50,000
22,500
8,500
22,500
12,500
.
35,000
.
8,500
5,000
27,500
9,000
.
59,000
Problem 14 6
1.
Letter C
Gross business income
Less: Business expenses
Less: Personal exemption basic
Net taxable income
P320,000
200,000
P120,000
50,000
P 70,000
Tax on P70,000
8,500
Naty Goc cannot claim the additional exemption of her minor child because her husband
is deemed head of family and proper claimant of the additional exemption. [Sec. 79(F),
NIRC]
2.
Letter A
Income tax due case 2 & case 3 (P2,500 + P4,000)
Less: Income tax due case 1
Income tax savings 200y
Gross income
Itemized
Amount distributed child
OSD (P200,000 x 40%)
Net income before exemption
Personal exemption
Net taxable income
Tax on P140,000
Tax on P30,000
Tax on excess:
Case 1: (P40,000 x 25%)
P 6,500
32,500
(P26,000)
Case 1*
P500,000
(300,000)
.
P200,000
( 20,000)
P180,000
P22,500
10,000
Case 2*
P500,000
(300,000)
(150,000)
.
P 50,000
( 20,000)
P 30.000
Case 3*
P150,000
( 60,000)
P 90,000
( 50,000)
P 40,000
P 2,500
P2,500
130

SUGGESTED ANSWERS

Case 3: (P10,000 x 15%)
Income tax due
.
P32,500
.
P 2,500
1,500
P 4,000
*Case 1 Income tax of the estate (no portion is distributed to heir).

*Case 2 Income tax of the estate (P150,000 is distributed to heir).
*Case 3 Income tax of the heir (P150,000 is received from estate).
The tax saving is brought about by splitting the taxable income between taxpayers thus
lowering the taxable income to lower tax rate and availing two personal exemptions.
Problem 14 7
1. Letter C
Gross income
Operating expenses allowed
Amounts given to beneficiaries
200x (P680,000/85%)
200y (P765,000/85%)
Personal exemption
Net taxable income
Tax on P500,000
Tax on excess:
200x: (P880,000 x 32%)
200y: (P1,380,000 x 32%)
Income tax due
200x
P 5,000,000
(2,800,000)
200y
P 6,000,000
(3,200,000)
( 800,000)
(
20,000)
P1,380,000
( 900,000)
(
20,000)
P1,880,000
P125,000
P125,000
281,600
.
P406,600
441,600
P566,600
The absolute exemption of P20,000 is to be used for the income of Mr. Anaos
estate while Mr. Anaos income will used the basic personal exemption of
P50,000.
2.
Letter A
200x
Amounts received by wife
200x: (P425,000/85%)
200y: (P510,000/85%)
OSD (40%)
200y
P500,000
(200,000)
P600,000
(240,000)
131

SUGGESTED ANSWERS
3.
Personal exemption
Net taxable income
( 50,000)
P250,000
( 50,000)
P310,000
Tax on P250,000
Tax on excess (P60,000)
Income tax due
Less: Creditable withholding tax
200x: (P500,000 x 15%)
200y: (P600,000 x 15%)
Income tax refund
Less: 200x income tax refund
200ys tax refund is lower by
P 50,000
.
P 50,000
P 50,000
18,000
P 68,000
75,000
.
P 25,000
Letter C
Amount received by Mr. Tag Anao, son in 200y
(P255,000/85%)
OSD (40%)
Personal exemption
Net taxable income
Tax on P70,000
Tax on excess (P60,000 x 20%)
Income tax due
Less: 200y Creditable withholding tax (P300,000 x 15%)
Income tax refund
90,000
P 22,000
25,000
(P 3,000)
P300,000
(120,000)
( 50,000)
P130,000
P
8,500
12,000
P 20,500
45,000
(P24,500)
A beneficiary of an estate engaged in business has the status of self-employed individual

taxpayer. It follows, therefore, that such beneficiary can claim the itemized deduction or optional
deduction in the computation of his net taxable income. Furthermore, the amount paid to the
beneficiary has not been subjected to business expenses.
Problem 14 8
C
Income of trust
Less: Amount distributed to the heir (P85,000/85%)
Absolute exemption
Net taxable income of trust
Problem 14 9
1. Letter B
Amount received from trust B (P4,800,000/80%) x 20%
Rent income (P285,000/95%)
Total income before OSD
Less: OSD (P1,500,000 x 40%)
P600,000
Basic personal exemption
50,000
P400,000
P100,000
20,000
P1,200,000
300,000
P1,500,000
650,000
120,000
P280,000
132

SUGGESTED ANSWERS
Net taxable income

Tax on P500,000
Income tax due
Less: CWT on amount received from trust
(P1,200,000 x 15%)
CWT from rent income (P300,000 x 5%)
Income tax still due and payable
2.
P 850,000
P125,000
112,000
P237,000
P180,000
15,000
195,000
P 42,000
Letter C
Less: Exemption
Net taxable income
Tax on P500,000
Tax on excess:
Trust A (P3,480,000 x 32%)
Trust B (P4,280,000 x 32%)
Income tax due of each trust
Total income tax due (P1,238,600 + P1,494,600)
Trust A
P4,000,000
20,000
P3,980,000
Trust B
P4,800,000
20,000
P4,780,000
P 125,000
P 125,000
1,113,600
.
P1,238,600
1,369,600
P1,494,600
P2,733,200
In case of more than one trust, the creator of the trust in each instance is the same person and
the trustee in each instance is the same but the beneficiaries are different, the trustee should
make a separate return for each of the trusts in his hands. When a trustee holds trust created
by different persons for the benefit of the same beneficiary, he should also make a return for
each trust separately. (Sections 208 & 215, Rev. Regs. No. 2; Sec. 60 (C)(2), NIRC]
Problem 14 10
1. Letter B
Income of the grantor
Income of trust A - revocable
Total income of the grantor
Less: Total expenses
Grantor business expense
Trust A business expense
Grantors income before personal exemptions
2.
Letter D
Income of trust B irrevocable trust
P1,000,000
500,000
P1,500,000
P400,000
200,000
600,000
P 900,000
P200,000
133

SUGGESTED ANSWERS
Less: Expenses of irrevocable trust B

Less: Exemption
Net taxable income of all the trust
100,000
P100,000
20,000
P 80,000
Assume beneficiary opted to use OSD.

3.
Letter D
Income of beneficiary
Add: Share from trust
Total gross income
Less: OSD (P150,000 x 40%)
Less: Personal exemption
Net income
P100,000
50,000
P150,000
60,000
P 90,000
50,000
P 40,000
Problem 14 11
1.
Letter A
The trust is not taxable because it is revocable. The supposed income tax of
the trust shall be included in the income tax of Mr. Tan.
2.
Letter D
Net income of Mr. Tan
Less: Basic personal exemption
Net taxable income
Tax on P500,000
Tax on excess (P1,450,000 x 32%)
Income tax due
P2,000,000
50,000
P1,950,000
P125,000
464,000
P589,000
Note: Only the income of irrevocable trust is entitled for special deduction.
3.
Letter A
Since the amount given to the daughter is not considered as deduction from irrevocable
trust, such amount is considered allowance. Therefore, not subject to tax.
Problem 14 12
1.
Conjugal gross income from estate
Less: Business expense (P5,000,000 x 40%)
Income distributed to beneficiaries
Conjugal net income
P5,000,000
P2,000,000
600,000
2,600,000
P2,400,000
134

SUGGESTED ANSWERS
200x income tax due from the estate of Mr. Baguingan:

Income share of Mr. Baguingan estate
(P2,400,000 x 50%)
Less: Exemption
Taxable income
P1,200,000
20,000
P1,180,000
Tax on P500,000
Tax on excess (P680,000) x 32%)
Income tax due
P 125,000
217,600
P 342,600
The estate of Mr. Baguingan will acquire a new TIN and file a separate ITR claiming P20,000
absolute exemption. If Mr. Baguingan has income in 200x prior to his death, such income
shall be filed separately using his TIN and allowed to deduct basic exemption as if he died at
the close of the taxable year.
2.
Compensation income
Add: Income received from trust
Total income before personal exemption
Less: Personal exemptions (P50,000 + P100,000)
Net taxable income
P250,000
200,000
P450,000
150,000
P300,000
Tax on P250,000
Income tax due
P50,000
15,000
P65,000
Note: Unless the taxpayer signifies in his ITR his intention to elect the OSD, he shall be
considered as having availed himself of the itemized deductions. (Sec. 34(L), NIRC)
Alternative solution: If beneficiary opted to use OSD
Compensation income
Add: Income received from trust, net of OSD (P200,000 x 60%)
Total income before exemption
Less: Personal exemptions:
Basic
Additional (P25,000 x 4)
Taxable income of Mrs. Diana Nievera
P250,000
120,000
P370,000
P 50,000
100,000
150,000
P220,000
Tax on P140,000
Income tax due
P 22,500
24,000
P 46,500
Total amount received by the children

Multiply by withholding tax rate
P600,000
15%
3.
135

SUGGESTED ANSWERS
Total withholding taxes
P 90,000
Problem 14 13
Tax savings:
(P122,000 + P8,500)
(Case 2 + Case 4) = (P86,000 + P42,500)
Tax savings
Supporting computations year
after death:
Gross income
Business deductions:
Itemized deductions
Distribution to beneficiary
Personal exemption
Net taxable income
Income tax for first bracket, P500,000
Case 1: (520,000 500,000) x 32%
Case 2: (370,000 250,000) x 30%
Case 4: (220,000 140,000) x 25%
Total income taxes
128,500
P 2,900
Case 1
Case 2
Case 3
Case 4
800,000
800,000
300,000
300,000
(260,000)
.
540,000
(20,000)
520,000
(260,000)
(150,000)
390,000
(20,000)
370,000
(180,000)
.
120,000
(50,000)
70,000
(180,000)
150,000
270,000
(50,000)
220,000
125,000
50,000
22,500
8,500
6,400
.
131,400
Problem 14 14
1. Income tax payable by the trust in 200x:
Income from house and lot
Income from hollow block business (P10,000 x 12)
Income from farm
Total gross income from trust
Less: Related expenses (P250,000 x 30%)
Amount distributed to the beneficiary
Less: Exemption
Net taxable income
Tax on P70,000
Total income tax payable
2.
P131,400
Income tax payable from the beneficiary in 200x:

Gross income received from income of trust
36,000
.
86,000
.
8,500
20,000
42,500
P 80,000
120,000
50,000
P 250,000
P 75,000
50,000
125,000
P 125,000
20,000
P 105,000
P
8,500
10,500
P 19,000
P 50,000
50,000
136

SUGGESTED ANSWERS
Net taxable income
Note: Unless the taxpayer signifies in his ITR his intention to elect the OSD, he shall be
considered as having availed himself of the itemized deductions. (Sec. 34(L), NIRC)
Alternative solution if Trust and beneficiary opted to use OSD
1.
Total gross income trust

Less: OSD (P250,000 x 40%)
Amount distributed to the beneficiary
Net taxable income
P250,000
P100,000
50,000
Tax on P70,000
2.
150,000
P100,000
20,000
P 80,000
P 8,500
2,000
P10,500
Gross income received from income of trust

Less: Optional standard deduction (P50,000 x 40%)
Net taxable income
P50,000
20,000
P30,000
50,000
(P30,000)
Problem 14 15
Correction: The requirement should be stated as: How much is the income tax due of the two
trusts?
Total net income of trusts (P50,000 + P1,000,000)
Less: Distribution to beneficiary (P10,000 + P20,000)
Exemption
Net taxable income
Tax on P500,000
Income tax due and payable
P1,050,000
P 30,000
20,000
50,000
P1,000,000
P125,000
160,000
P285,000
Problem 14 16
Note: Since the topic is tax planning and the requirement is tax savings, OSD can automatically
assumed to be used to determine the lower tax.
137

SUGGESTED ANSWERS
1.
Gross receipts
Less: OSD (P300,000 x 40%)
Less: Exemption
Net income subject to income tax
P300,000
120,000
P180,000
20,000
P160,000
The P300,000 is the business gross receipts of the estate; therefore, subject to P20,000
exemption.
2.

(P59,000 + P8,500)
(Case 2 + Case 4) = (P35,000 + P27,500)
P 67,500
62,500
P 5,000
Tax savings
Supporting computations:
Gross business receipts
Distribution to the beneficiary
Balance
OSD 40%
Exemption
Net taxable income
Case 1
Case 2
Case 3
Case 4
500,000
.
500,000
(200,000)
300,000
(20,000)
280,000
500,000
(150,000)
350,000
(140,000)
210,000
(20,000)
190,000
200,000
.
200,000
(80,000)
120,000
(50,000)
70,000
200,000
150,000
350,000
(140,000)
210,000
(50,000)
160,000
50,000
22,500
8,500
22,500
12,500
.
35,000
.
8,500
5,000
27,500
Income tax for first bracket

Case 1 (P280,000 P250,000) x 30%
Case 2 (P190,000 P140,000) x 25%
Case 4: (160,000 140,000) x 25%
Total income taxes
9,000
.
59,000
Problem 14 17
1.
To minimize income tax, Dokling can do the following:
a. Put his business under irrevocable trust
b. Use OSD instead of itemized deduction because the OSD is greater than the
itemized deduction, and
c. Claim his childs allowance as amount of distribution to beneficiary from the
income of the trust.
2.
Tax exposure before the creation of trust:

Gross income
Less: OSD (P400,000 x 40%)
Net taxable income
P400,000
160,000
P240,000
50,000
P190,000
138

SUGGESTED ANSWERS
Tax on P140,000
Income tax due
P22,500
12,500
P35,000
Note: The allowance is not deductible because the child is not established as
beneficiary of the trust. Furthermore, the business is not in trust.
50% of the business is created as irrevocable trust:
Grantor:
Income tax if 50% is held in trust (irrevocable)
Gross income (50%)
Less: OSD (P200,000 x 40%)
Net taxable income
P200,000
80,000
P120,000
50,000
P 70,000
Tax on P70,000
Trust:
Income tax if 50% is held in trust (irrevocable)
Gross income (50%)
Less: OSD (P200,000 x 40%)
Distribution to beneficiary
Less: Exemption
Net taxable income
Beneficiary:
Share from the income of trust
Less: OSD (P100,000 x 40%)
Net taxable income
( 8,500)
P200,000
P 80,000
100,000
P180,000
P 20,000
20,000
P - 0 -
P100,000
40,000
P 60,000
50,000
P 10,000
Tax on P10,000
500)
Tax savings
P26,000
Problem 14 18
Note: Since the topic is tax planning, the taxpayer should use OSD instead of itemized deduction
because using OSD can give a greater tax savings based on the given data of this case.
1.
Rent income
Less: OSD (P800,000 x 40%)
P 800,000
320,000
P 480,000
50,000
139

SUGGESTED ANSWERS
2.
2.
Net income
P 430,000
Tax on P250,000
Add: Tax on excess (P180,000 x 30%)
Income tax due
P 50,000
54,000
P104,000
Rent income Property 2

Less: OSD (P300,000 x 40%)
Net income
P 300,000
120,000
P 180,000
50,000
P 130,000
Tax on P70,000
Add: Tax on excess (P60,000 x 20%)
Income tax due
Less: Income tax property no. 1
Rent income Property 1

Less: OSD (P500,000 x 40%)
Net income
P 500,000
200,000
P 300,000
20,000
P 280,000
Tax on P250,000
P 50,000
9,000
Tax savings
8,500
12,000
( 20,500)
( 59,000)
P 24,500

Income Taxes of Estates & Trusts: Income Taxation 6Th Edition (By: Valencia & Roxas) Suggested Answers

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INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Chapter 14: Income Taxes of Estates & Trusts