1

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

Chapter 5: Exclusion from Gross Income

CHAPTER 5

EXCLUSION FROM GROSS INCOME

Problem 5 1 TAXABLE OR NONTAXABLE with income tax

1.
Taxable
11.
Taxable
21.
Nontaxable
2.
Nontaxable
12.
Taxable
22.
Taxable
3.

Taxable
13.
Nontaxable
23.
Nontaxable
4
Nontaxable
14.
Taxable
24.
Taxable
.

5.
Taxable
15.
Nontaxable
25.
Nontaxable
6.
Nontaxable
16.
Nontaxable

7
Nontaxable
17.
Taxable

8.
Taxable
18.
Taxable

9.
Nontaxable
19.
Taxable

10.
Nontaxable
20.
Taxable

Problem 5 2 TAXABLE OR NONTAXABLE with income tax

1.
Nontaxable
11.
Taxable
21.
Nontaxable
2.
Taxable
12.
Taxable
22.
Nontaxable
3.
Nontaxable
13.
Nontaxable
23.
Taxable
4
Taxable
14.
taxable
24.
Nontaxable
.

5.
Nontaxable
15.
Nontaxable
25.
Nontaxable
6.
Nontaxable
16.
taxable
26.
Taxable
7
Taxable
17.
taxable
27
Nontaxable
.

8.
Taxable
18.
Nontaxable
28
Taxable
9.
Taxable
19.
Nontaxable
29
Taxable
10.
Nontaxable
20.
Nontaxable
30
Nontaxable
Problem 5 3
TRUE OR FALSE

True

False only Philippine charity sweepstakes are not subject to tax in the Philippines.

False subject to normal tax, in general

False nontaxable because the other income is subjected only to final tax.

True

True

False Proceeds of life insurance is not taxable regardless of whoever would be the recipient, except when
the insured person outlived his life insurance and received the proceeds. The excess of proceeds over
premium paid is taxable.

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

Chapter 5: Exclusion from Gross Income

False include in gross income

False Bequest is a personal property.

True

True

True

False nontaxable because it is just a return of expenses

True, in general

False nontaxable

Problem 5 4 TRUE OR FALSE

True

False nontaxable because aliens are taxable only for income derived within the Philippines.

False the P3M capitalization does not include the land asset of BMBE.

True

True

False nontaxable

False nontaxable in general

True

True

False some prizes and awards are exempt by law from taxation.

True

True

False Include in gross income because income from gift is subject to income tax.

False Tax-exempt

True

Problem 5-5
Problem 5-6
Problem 5-7
1.
D
1.
A
1.
B
2.
D
2.
D
2.
D
3.
C
3.
D
3.
C
4.
C
4.
B
4.

D
5.
A
5.
A
5.
B
6.
D
6.
B
6.
D
7.
C
7.
C
7.
A
8.
D
8.
B
8.
D
9.
A
9.
D
9.

C
10.
C
10.
D
10.
D

Problem 5 8
A

Basic minimum wage

P 90,000
th

13

month pay

7,500
15-day monetized unavailed vacation leave
3,750
Overtime pay

24,000

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

Chapter 5: Exclusion from Gross Income

Holiday pay

2,250
Christmas bonus (de-minimis)

5,000
Total nontaxable income

P132,500
Problem 5 9
B

th

13

month pay

P
6,500
Deductible from gross compensation income:

SSS contribution

P3,000

Philhealth contribution
2,500

5,500
Amount excluded from gross income

P12,000

Problem 5 10
C

Dividend income

P 60,000
Interest income on EFCD to be taxable in the Philippines must be transacted with

residents.

Problem 5 11

Income from the Philippines:

Wagwag business (P5,000 x 12)

P 60,000
Sari-sari store (P20,000 x 12)
240,000

Gross taxable income in the Philippines

P300,000
Problem 5 12
D

th

13

month pay (P390,000/13)

P30,000
De minimis with the ceiling amount:

Rice subsidy (P1,500 x 12)

18,000

Clothing allowance

4,000

Amount of nontaxable compensation

P52,000

The excess of rice subsidy over the ceiling is already taxable, because the 13

Problem 5 13
C

Taxable
Nontaxable
Total basic salary

P240,000

th

mo. pay is already P30,000.

th

13

month pay

20,000
Excess rice subsidy

6,000
De minimis rice subsidy (P24,000 P6,000)
.

18,000
Total nontaxable compensation
P240,000
44,000

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

Chapter 5: Exclusion from Gross Income

The P6,000 excess of rice subsidy is still exempt because if

combined w/13

th

mo pay and other benefit the

amount does not exceed P30,000.

Problem 5-14

MWE

Basic salary

P 96,000
Overtime pay

20,000

Hazard pay

2,000

Holiday pay

1,000

th

13

mo. Pay

8,000

Excess rice subsidy

6,000

Rice subsidy w/in ceiling

18,000

Total nontaxable

P151,000
Taxable

P
0

Problem 5-15
B

MWE:

Taxable
Non-taxable

Basic salary

P108,000

o.t. pay

30,000

hazard pay

2,000

holiday pay

1,000

th

13 mo.+ similar benefits:

th

13

mo. Pay

9,000

Excess rice subsidy

18,000

Excess clothing to complete P30,000

13,000
3,000

Rice subsidy de minimis

18,000

Clothing allowance

4,000

Total

P154,000

P52,000

An employee who receives additional compensation such as commissions, honoraria,

fringe benefits, benefits in excess of the allowable statutory amount of P30,000, taxable
allowances and other taxable income other than the SMW, holiday pay, overtime pay,
night shift differential pay and hazard pay shall not enjoy the privilege

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

Chapter 5: Exclusion from Gross Income

of being a MWE and, therefore, his/her entire earnings are no longer exempt from

income tax.

Problem 5-16
D

Taxable
Non-taxable

MWE:

Basic salary

96,000

o.t. pay

20,000

th

13 mo.+ similar benefits:

th

13

mo. Pay

8,000
Excess rice subsidy

6,000
Rice subsidy

18,000

Rent income

60,000

Interest income, 4,000/80%

5,000

Total

181,000
32,000

MWEs receiving other income, such as income from the conduct of trade, business,
or practice of profession, except income subject to final tax, in addition to
compensation income are not exempted from income tax on their entire income
earned during the taxable year.

5-17

Only P1,500 sickleave benefit actually taken.

Problem 5 18
C

Take home pay

P212,000
th

Nontaxable 13

month pay

( 17,500)
Withholding tax

13,500
Other income subject to normal tax
20,000
Taxable income

P228,000

In general, a MWE is not subject to WTW and income tax on his compensation income. But if he has other
income that is subject to normal tax, his entire income during the year will be subject to income tax, his
compensation income, however, will not be subject to WTW.

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

Chapter 5: Exclusion from Gross Income

Problem 5 19
C

Taxable
Nontaxable

Net pay

P265,000

Withholding tax
50,000

Advances
6,000

3th month pay

(27,000)

P27,000
Christmas bonus (de minimis)
( 5,000)

5,000
SSS contribution

4,000
Totals

P289,000
P36,000

Problem 5 20

Taxable
Tax-exempt
Net take home pay

P13,000

SSS contributions

P300
PAG-IBIG contributions

100

Union dues contributions

100

Office party contributions

75

Charitable contribution (deductible only from business income)

25

Withholding income tax

400

Totals

P13,500

P500

Problem 5 21
D
Monthly salary

P15,000
Free board and lodging is for convenience of employer.
Problem 5 22
B
Rent of apartment

P 50,000
Reimbursement
20,000
Taxable benefits

P70,000

Note that the tax base to determine the tax liability of supervisor should be the grossed-up amount, meaning
P70,000/68%.

Problem 5 23
D

Proceeds of life insurance including 12% interest for 2 years

P1,254,400
Less: Present value of life insurance proceeds (P1,254,400 x 0.797193877)
1,000,000
Interest income - Taxable

P 254,400

Proceeds of life insurance policy are not taxable but the interest thereof is taxable. (Rev. Rev.2, Sec.22;
Sec.32Ba, NIRC)

Problem 5 24

Proceeds of life insurance policy are not taxable.

Problem 5 25

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

Chapter 5: Exclusion from Gross Income

Maturity value received

P500,000
Premium paid
(490,000)

Premium refund

40,000

Income in excess of premium paid

P 50,000

The premium refund is actually a decrease of premium paid.

Problem 5 26

Zero, because, the P270,000 cash surrender value is just a partial return of total contribution of P360,000.

Problem 5 27
D

Car insurance

P300,000
Accident insurance

100,000
Life insurance as beneficiary

500,000
Cash surrender value of life insurance
30,000
Participating dividend

10,000
Total amount excluded from gross income
P940,000

The participating dividend and cash surrender value are considered return of premium. The interest income,
however, is included in the gross income. It represents income from the use of insurance proceeds not yet
taken. (Sec. 62, Regs. No. 2)

Problem 5 28

1. Letter C

Total premium paid excluded

P500,000

The total premium paid is excluded because such amount represents return of capital. [Sec. 32 (B)(2), NIRC]

2. Letter A

Total consideration received excluded

P2,000,000

The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured are
excluded from the gross income of the beneficiary. [Sec. 62, Regs. No. 2; Sec. 32 (A) (1), NIRC]

Problem 5 29
D

Taxable
Nontaxable

Actual damages for unrealized profit

P100,000

Interest on non-taxable damages

20,000

Actual damages for lost products

P200,000
Exemplary damages due to injuries

50,000
Moral damages due to injuries

50,000
Actual liquidated damages
.

80,000
Total

P120,000

P380,000

Note: On the part of Ernie Barron, the attorneys fee is only a reimbursement of his judicial expenses, but on the

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

Chapter 5: Exclusion from Gross Income

part of the counsel, such amount is reportable income.

Problem 5 30

Taxable income

P -0-

Problem 5 31

The retirement pay should be included in the gross income because Max retired at an optional age and has
rendered less than 10 years in service. To be excluded from gross income, an employee should have been in
the service of the same employer for at least ten (10) years and at least 50 years at the time of his retirement.
[Sec. 32 (B)(6)(a), NIRC]

Problem 5 32
C

Cost of life annuity contract

P1,350,000
Divided by expected return (P360,000 x 15 years)

5,400,000
Cost ratio

25%
Multiplied by annual pension

360,000
Annual amount of pension excluded from gross income

P
90,000

Problem 5 33
D

Taxable

Nontaxable
Terminal pay

P
60,000

Life insurance

500,000

SSS death benefit

10,000
Donations

40,000

Totals

P - 0 -

P610,000
Problem 5 34
A

The termination is due to cause within the control of Jalosjos, separation pay is taxable.

Problem 5 35
D

Last pay upon resignation from his first employer

P100,000
Problem 5-36
B

SSS death benefit of P36,000

Problem 5-37
A

Sickness benefit (P300 x 6 days x 90)

P
1,620
Maternity benefit (P300 x 78 days x 100%)

23,400
Total exclusion

P25,020

SSS sickness benefit is equal to 90% of daily salary credit after compliance with certain conditions. SSS daily
maternity leave benefit is equivalent to the average daily salary credit for 60 days or 78 days in case of
caesarian delivery, subject to certain conditions. [Sec. 14, R.A. 1161; R.A. 8282, as amended]

Problem 5 38

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

Chapter 5: Exclusion from Gross Income

Zero, all items enumerated are not subject to income tax.

Problem 5 39
C

Interest income from bank savings deposit, subject to final tax at source

P4,000
His annual income from professional fee is not more than P60,000 which is exempt.

Problem 5 40
D

Zero. Gifts are generally subject to donors tax and are not subject to income tax.

Problem 5 41
D

Total income (P100,000 x 10 months)

P1,000,000
Total average expenses (P20,000 x 10 months)
(
200,000)
Income subject to income tax
P
800,000
Problem 5 42
D

Zero. All winnings received by Miss Lara are subject to tax because she has entered into a contest (Miss
International) which requires rendition of subjstantial future services as a condition to receive such prize or
award.

Problem 5 43
A

Lotto Philippine winnings

P10,000,000
Problem 5 44
B

Ramon Magsaysay award

P
50,000
Athlete of the year award

100,000
Prize for winning the silver Olympic medal

500,000
Cash award from Mr. Lim

250,000
Car from Nissan

1,000,000
Winnings Philippine sweepstakes

100,000
Total winnings/awards not subject to income tax
P2,000,000
Problem 5 45
A

Interest income

P
60,000
Gain from sale of bonds classified as capital asset

140,000
Taxable income

P200,000

Interest income on government bonds is taxable. Gain from sale of certificate of indebtedness is tax-exempt
only when the maturity is more than 5 years. [Sec. 32 (B)(7)(g), NIRC]

Problem 5 46
B

Interest received from bond investment

P 120,000
Problem 5 47
B

Interest income

P120,000

10

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

Chapter 5: Exclusion from Gross Income

Problem 5 48
D

Interest on expanded foreign currency deposit

P100,000

Problem 5 49
A

Income from sale of invented products

P5,000,000
Sale of technology

2,000,000

Total revenue

P7,000,000
Less: Research and development costs

800,000

Nontaxable income

P6,200,000

Note: The cost of product produced need not to be deducted anymore because of the term income from sale
of invented products.

Problem 5 50
C

Interest income on bank savings deposit

P10,000
Problem 5 51
C

Interest income from foreign currency deposit

P2,000,000
Interest income from time deposit
1,000,000
Total taxable income

P3,000,000
Problem 5 52

1. Compensation income (P5,000 x 10)

P
50,000

2.
Retirement benefits

P500,000

Salary earned

50,000

Gross income

P550,000
3.
Same answer with No. 1

P
50,000

Problem 5 53

Winnings from charity horse race sweepstakes from PCSO

P
500,000
Gains from redemption of shares in mutual fund

300,000

Gain from sale of bonds with maturity of more than five years

60,000

Gifts from friends

200,000
Total exclusion from gross income

P1,060,000

Problem 5 54

Exclude

Include

Proceeds of his life insurance (P2,000,000) (P15,000 x 25)

P 375,000
P1,625,000
Proceeds of his mothers life insurance
1,000,000

Cash gift

50,000

Inheritance

3,000,000

Rent income

100,000
Total

P1,725,000

11

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

Chapter 5: Exclusion from Gross Income

P4,425,000

Problem 5 55

No, the P1,500,000 transfer to be received by Miss Tandana is to be included for income taxation because
the transfer is in recognition of her services rendered. It is not to be included as a part of estate tax.

Problem 5 56

Dividend income
P50,000
Interest income
2,000
Prizes
25,000
Total taxable income
P77,000

Problem 5-57

None the taxpayer is a MWE and the benefits does not exceed the allowable statutory amount of P30,000.

2.

Gross compensation

P109,200
SSS premium
(
2,400)
Philhealth premium
(
3,000)
Taxable compensation income
P103,800

Problem 5 -58

Answer for both no. 1 and no.2

Compensation

P128,000
SSS premium

(2,400)
Philhealth

(3,000)
Gross taxable compensation income

P122,600

Note: The MWE with earnings subject to normal tax shall be taxable for his entire income during the year.

Problem 5 -59

1 Time deposit

P60,000
.

Foreign currency deposit

10,000

12

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

Chapter 5: Exclusion from Gross Income

Cooperative income subject to final tax

P70,000
2 Cooperative income subject to normal tax
P -0.

The cooperatives ordinary income such as sales and income from lending to
members are not subject to income tax.