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Deductions from

Gross Estate
Ordinary Deductions

• Expenses, Losses, Indebtedness, Taxes

• Transfer for Public Use

• Vanishing Deductions
Expenses, Losses, Indebtedness, Taxes

• Funeral expenses
– It must be expenses of the death of the decedent
– It must be substantiated
– It must be incurred from the point of death until interment
– It must have been paid from or are chargeable against the
properties of the decedent
– The deductible funeral expense must not exceed 5% of the
gross estate of the decedent or P200,000
Expenses, Losses, Indebtedness, Taxes
• Funeral expenses
Illustration: Mrs. Mina Las had an accident on February
14, 2016. She was hospitalized and spent P200,000 on
hospitalization. However due to fatal wounds she died
on February 18, 2016. Total expenses of the wake up to
the point of burial were P280,000, P100,000 of which
were paid by friends and relatives. His heirs also paid
P15,000 for the upkeep of the tombstones and novenas
and thanksgiving publication on the newspaper. Mrs.
Mina had gross estate amounting to P5,000,000. How
much is allowable deduction for funeral expense?
Expenses, Losses, Indebtedness, Taxes

• Funeral expenses
Illustration: Mr. Pina Tay succumbed to lung cancer on
February 14, 2017. He was hospitalized for a year
spending P1,500,000. Total expenses of the wake up to
the point of burial were P300,000, P50,000 of which
were paid by friends and relatives. His heirs also paid
P20,000 for the upkeep of the tombstones (amount is
included in the P300,000). Mr. Pina had gross estate
amounting to P3,000,000. How much is allowable
Expenses, Losses, Indebtedness, Taxes

• Funeral expenses
Illustration: Mrs. Ginom Bag died on February 14,
2015. Total expenses of the wake up to the point
of burial were P500,000, P200,000 of which were
paid by friends and relatives. Mrs. Mina had
gross estate amounting to P4,500,000. How
much is allowable deduction for funeral
expense?
Expenses, Losses, Indebtedness, Taxes

• Funeral expenses
Illustration: Mrs. Maya Man died with a total
estate of P10,000,000. The following expenses
relates to Maya
Hospitalization costs P500,000
Mourning apparel 15,000
Food and drinks served at the wake 30,000
Food and drinks served on the 40th day (after burial) 100,000
Cost of tombstone 80,000
Expenses, Losses, Indebtedness, Taxes

• Judicial expenses
– If paid, it must be substantiated with receipts or invoices
– Any unpaid amount should be supported by a sworn
statement of account issued and signed by the creditor
– The judicial expenses must be incurred within 6 months from
the date of death of the decedent
Expenses, Losses, Indebtedness, Taxes

• Judicial expenses
Illustration: The estate of the decedent incurred
the following:
Salary of executor P 90,000
Professional fee to lawyer, accountant, appraisers 350,000
Cost of upkeep of the estate properties 50,000
Cost of upkeep of burial tomb 20,000
Cost of disposing properties (40% was incurred after six months) 150,000
Expenses, Losses, Indebtedness, Taxes

• Losses
Illustration: Mr. Ong died in a freak accident on
February 14, 2015. The following losses of
properties were identified by his estate
administrator:
Theft of personal valuables on December 31, 2014 P 200,000
Loss on fire of properties covered by insurance 1,000,000
Loss on robbery on December 30, 2015 500,000
Inventory loss claimed as deduction in ITR of the estate 200,000
Unpaid loans receivable from a worthless account 50,000
Expenses, Losses, Indebtedness, Taxes

• Claims Against Insolvent Person


Illustration: Mr. Ong died in a freak accident on
February 14, 2015. The following losses of
properties were identified by his estate
administrator:
Theft of personal valuables on December 31, 2014 P 200,000
Loss on fire of properties covered by insurance 1,000,000
Loss on robbery on December 30, 2015 500,000
Inventory loss claimed as deduction in ITR of the estate 200,000
Unpaid loans receivable from a worthless account 50,000
Claims against insolvent person
• The unrecoverable amount of claim from an insolvent
person is presented as a deductible amount.
• Illustration:
Mr. Yaman died with a total receivable of P150,000
from Mr. Hirap. The latter was declared by the court
as bankrupt with only P1,000,000 total assets but
with P1,500,000 in total liabilities.
Claims against insolvent person
• The unrecoverable amount of claim from an insolvent
person is presented as a deductible amount.
• Illustration:
Mr. Grabe died with a total receivable of P300,000 from Mr.
Utangera. The latter was declared by the court as bankrupt
with only P950,000 total assets but with P1,350,000 in total
liabilities. Mr. Utangera had priority creditors amounting to
P150,000.
Claims against the estate
• Unpaid Mortgage
• Illustration:
The gross estate of Mr. Yeyemenen includes a land
amounting to P1,200,000. It includes a mortgage
amounting to P200,000.
Claims against the estate
• Unpaid Mortgage
• Illustration:
The gross estate of Mr. Yabang includes a building
amounting to P850,000. It includes a mortgage
amounting to P300,000, of which P100,000 has
already been paid before death and P150,000 after
death.
Claims against the estate
• Unpaid Taxes – only tax obligation existing at the
point of death are deductible. Taxes settled before
death or those accruing after death are nondeductible.
• Accommodation Loan – one contracted by a person in
behalf of another person with the contracting person
merely representing in behalf of the other person who
will be the beneficiary of the loan proceeds.
Claims against the estate
• Requisites of deductibility
1. The liability represents a personal obligation of the
deceased existing at the time of his death except unpaid
funeral, judicial and medical expenses;
2. The liability was contracted in good faith and for
adequate and full consideration in money or money’s
worth;
Claims against the estate
• Requisites of deductibility
3. The claim must be a debt or claim which was valid in
law and enforceable in court
4. The indebtedness must not have been condoned by the
creditor or the action to collect from the decedent must
not have prescribed.
Claims against the estate
• Substantiation requirements
1.Simple Loan and advances
• Duly notarized debt instrument
• Duly notarized Certification from the creditor
• Proof of financial capacity of the creditor as well as
latest audited balance sheet
Claims against the estate
• Substantiation requirements
1.Simple Loan and advances
• Statement under oath executed by the administrator or
executor of the estate reflecting the disposition of the
proceeds of the loan if said loan was contracted within
three years prior to the death of the decedent
Claims against the estate
• Substantiation requirements
2. Purchase of goods and services
• Pertinent documents evidencing purchase of goods and
services
• Statement of account
• Duly notarized certification
• Certified copy of latest audited balance sheet of creditor
Claims against the estate
• Substantiation requirements
3. Where the settlement is made through the Court in
a testate or intestate proceeding, pertinent
documents filed with the court
Claims against the estate
• Illustration
The heirs of Mr. Baba Ero, a bachelor, who died on February
14, 2017 were able to identify the following obligations:
Personal loan condoned by the creditor P100,000
Unpaid funeral expenses 50,000
Promissory note, collectible until January 1, 2017 20,000
Bank loan, with accrued interest as of Feb. 14, 2017 120,000
Claims against the estate
• Illustration
The heirs of Mr. Pa Asa, a bachelor, who died on November
1, 2015 were able to identify the following obligations:
Personal loan P50,000
Unpaid income tax Mr. Asa when he was still alive 30,000
Unpaid real estate tax accruing after Mr. Asa’s death 5,000
Bank loan 100,000
One year accrued interest on bank loan as of 12-31-15 12,000
Claims against the estate
• Illustration
The executor of Mr. Macho Papa compiled the following
obligations:
Obligation on the exclusive property of Mrs. Papa 20,000
Unpaid medical expense 150,000
Interest on loan accruing after death 50,000
Obligations of the separate property of Mr. Papa 80,000
Transfer for Public Use
• The amount of all bequests, legacies, devises or
transfer to or for the use of the Government of the
Republic of the Philippines, or any political
subdivision thereof, for the exclusive public purpose.
Vanishing Deductions
• There are instances where properties are transferred
between persons in short periods of time causing a
series of transfer taxation.
Vanishing Deductions
• Requisites of vanishing deduction
1. Present decedent must have died within five years from the date
of death of the prior decedent or date of gift
2. The property with respect to which the deduction is claimed
must been part of the gross estate situated in the Philippines of
the prior decedent or taxable gift of the donor
3. The property must be identified as the same property received
from prior decedent or donor or the one received in exchange
therefore
Vanishing Deductions
• Requisites of vanishing deduction
4. The estate taxes on the transmission of the prior estate or
donor’s tax on the gift must have been finally determined and
paid
5. No vanishing deduction on the property or the property given
in exchange was allowed to the prior estate
Vanishing Deductions
• Illustration:
Ms. Pina Asa died on June 1, 2017. She had a condo unit
which she purchased on June 1, 2016, a car she received as
a donation on July 1, 2010, a residential house she
inherited from her mother when the latter died on July 10,
2015, commercial building she purchased on June 1, 2016
using money she received by way of donation on April 1,
2000.
Vanishing Deductions
• Procedural Computation
1. Determine the initial value
The initial value is the fair market value of the property at the date of the
first transfer or the fair value at the date of death whichever is lower.
2. Determine the initial basis
The initial basis is the initial value reduced by any indebtedness
on the property which was assumed and paid by the present
decedent before his or her death.
Vanishing Deductions
• Procedural Computation
3. Determine the final basis
The final basis is the initial basis reduced by a proportion of other
ordinary deductions which the initial basis bears over the gross estate of
the decedent.
4. Determine the vanishing deduction
The vanishing deduction is the final basis multiplied by the
vanishing percentages.
Vanishing Deductions
If decedent died within Vanishing Percentage
1 yr from receipt of property 100%
2 yrs from receipt of property 80%
3 yrs from receipt of property 60%
4 yrs from receipt of property 40%
5 yrs from receipt of property 20%
More than five years 0%
Vanishing Deductions
• Illustration:
Ms. Mina Las died with the ff. properties and allowable deductions:
Value upon inheritance Value at death
Inherited car – 2 years ago P2,500,000 P1,500,000
Other properties 6,500,000
Deductions:
Funeral expense 150,000
Judicial expenses 180,000
Mortgage on the car 800,000 300,000
Indebtedness and taxes 1,000,000
Transfer for public use 420,000
Vanishing Deductions
Mr. Pina Tay died on Feb. 14, 2017 leaving the ff. upon his death
Commercial land received as inheritance on Mar. 3, 2014 P2,500,000
Banana plantation bought from the money donated
by his friend on January 1, 2000 750,000
Rest house inherited by Mr. Tay after marriage
on April 15, 2015 2,400,000
Residential lot, donated by his mother
on February, 2016 1,500,000
Other properties 7,000,000
The commercial land had a fair value of P2,000,000 on 03-03-14 and Mr. Tay paid
mortgage of P500,000. The rest house was donated by Mr. Pina to DSWD. The residential
lot was mortgaged by Mr. Tay for P1,800,000. P800,000 was paid before his death.
Vanishing Deductions
Deductions:
Funeral expenses P250,000
Judicial expenses 500,000
Medical expenses 750,000
Losses 250,000
Claims against an insolvent person 50,000
Vanishing Deductions
On November 14, 2015, Ms. Wala Na died leaving the following properties:
Agricultural land, inherited February 14, 2013 P1,200,000
House and lot 2,000,000
Cash 2,800,000
Car 500,000
Other properties 1,000,000
Mortgage on the agricultural land upon inheritance 500,000
Other indebtedness 1,200,000
Deductible losses and expenses 400,000
Wala paid P300,000 in mortgage before her death. The prior estate paid the estate tax
on the agricultural land which was then valued at P1,000,000. Compute vanishing
deductions
Comprehensive Problem
Mr. Hin D. Pinalad died leaving the following properties:
Agricultural land, received as inheritance 3 years ago P1,000,000
House and lot 1,000,000
Cash 200,000
Other properties 1,300,000
Mortgage assumed on the agricultural land upon inheritance 200,000
Funeral expenses 250,000
Judicial expenses 130,000
Claims against insolvent person 200,000
Transfer for public use 800,000
Deductible losses 650,000
Compute estate after deductions
Comprehensive Problem
Mrs. Dina Inabot died in March 1, 2016 leaving the following properties:
Exclusive property of Dina P1,500,000
Exclusive property of Manny, Dina’s spouse 1,800,000
Common properties of the spouses 1,700,000
Unpaid mortgage on Manny’s exclusive properties 250,000
Unpaid real estate taxes on common properties of spouses 350,000
Funeral expenses 300,000
Judicial expenses 130,000
Dina’s receivables that can no longer be recovered 200,000
Compute estate after deductions
Special Deductions
 Family Home

 Standard Deductions

 Medical Expenses

 Benefits under RA 4917


Family Home
• Includes the dwelling house, including the land on which it is
situated, where the decedent and or members of his family
reside as certified by the Barangay Captain of the locality
• The allowable deduction must not exceed P1,000,000.
• Not only married decedents can claim family home. A single
decedent who is a head of a family can also claim deduction for
family home.
Family Home
• Illustration
Mr. Sino Kaman died leaving a family home with fair
value of P900,000 at the date of death.
Family Home
• Illustration
Mr. Sino Kaman died leaving a family home with fair
value of P1,800,000 at the date of death.
Family Home
• Illustration
Mr. Grabe Sha died leaving a family home consisting a
lot valued at P500,000 and house valued at
P1,200,000.
Case 1 – Lot is exclusive of Mr. Sha, house is common
Case 2 – Lot is common, house is exclusive of Mrs. Sha
Case 3 – Lot is common, house is exclusive of Mr. Sha
Standard Deduction

• A deduction in the amount of P1,000,000 shall be


allowed as an additional deduction without the
need of substantiation. The full amount of
P1,000,000 shall be allowed as deduction for the
benefit of the decedent.
Medical Expenses

• Medical expenses incurred (whether paid or


unpaid) by the decedent within 1 year before the
death of the decedent shall be allowed as a
deduction provided that the same are duly
substantiated provided further that the amount
thereof, whether paid or unpaid, does not exceed
P500,000
Medical Expenses
• Illustration:
The heirs of Mr. Mapag Mahal who died on June 12, 2017 found the
following receipts:
Purchase of medicines – January 10, 2017 P100,000
Hospital bills – February 14, 2017 360,000
Doctor’s fees – February 14, 2017 250,000
- February 14, 2016 250,000
Compute allowable medical expense.
Benefits Under RA 4917

• Any amount received by the heirs from the


decedent’s employer as a consequence of the
death of the decedent-employee in accordance
with RA No. 4917 is allowed as a deduction
provided that the amount of the separation
benefit is included as part of the gross estate of
the decedent.
Deductions from Gross Estate

 Ordinary

 Special

 Share of Surviving Spouse


Share of the Surviving Spouse

• One-half of the net conjugal or community


properties of the spouses.
Mr. Pepe Chugin died on March 1, 2015. Pepe received a piece of land
inherited from his mother on December 25, 2014. The value of the land
was P1,000,000 on Dec. 25 and P1,800,000 on March 1, 2015. Pepe
assumed P300,000 mortgage on the land. He had other exclusive
properties amounting to P2,500,000 and common properties amounting
to P3,000,000, including a family home amounting to P1,500,000.
Expenses during his wake and burial amounted to P180,000. Judicial
expenses incurred amounted to P360,000. Included in his exclusive
properties are claims that are no longer collectible amounting to
P250,000. Pepe also incurred P750,000 in medical fees 75% were
incurred when he was hospitalized in March 10, 2014 and the rest when
he was hospitalized in January 1, 2014. Pepe devised in his will an
exclusive property to be given to Dep. Ed amounting to P500,000
Mr. Sam Smeeth, a nonresident alien unmarried decedent died with the
following gross estate and deductions:
Philippines Abroad
Family home P 0 P2,000,000
Other properties 5,000,000 3,000,000
Funeral expenses 250,000
Judicial expenses 120,000 300,000
Claims against the estate 250,000 1,200,000
Losses on properties 350,000 600,000
Medical expenses 200,000 300,000
Vanishing deductions 120,000 50,000
Transfer for public use 30,000 100,000
1. Deductible ELIT 4. Special deductions
2. Deductible vanishing deduction 5. Net taxable estate
3. Deductible transfer for public use 6. Compute estate tax
Rules on Claiming Deductions
Resident or Citizen Nonresident Alien
Ordinary deduction p p
Special deduction p X
Share of surviving
spouse p p

• Deductions allowed to nonresident alien decedents


1. Prorated expenses, losses, indebtedness and taxes
2. Property previously taxes (vanishing deduction)
3. Transfer for public use
4. Share of surviving spouse
Rules on Claiming Deductions
• The same vanishing deduction shall be deductible provided
that the property subject to vanishing deduction is within
the Philippines at the date of death. No vanishing deduction
can be claimed in respect of properties located abroad.
• Transfer for public use by non-resident alien decedents are
deductible only if the properties being transferred to the
Philippines government are situated in the Philippines.
Determination of Estate Tax
Mang Jose, an unmarried Filipino decedent died leaving the following
properties and deductions:
Phils. Abroad
Real property (other than family home) P1,000,000 P 500,000
Family home 1,500,000 -
Personal property 180,000 350,000
Funeral expenses 150,000 30,000
Judicial expenses 180,000 25,000
Indebtedness 30,000 180,000
Losses 45,000 50,000
Medical expenses 180,000 160,000
Determination of Estate Tax
Lee Ming Ming, an unmarried Korean nonresident decedent died
leaving the following properties and deductions:
Phils. Abroad
Real property (other than family home) P 500,000 P2,500,000
Family home 805,000 -
Personal property 200,000 295,000
Funeral expenses 250,000 50,000
Judicial expenses 180,000 25,000
Transfer for public use 25,000 -
Vanishing deductions 45,000 100,000
Medical expenses - 500,000
Determination of Estate Tax
Bebe Ko, a married resident alien decedent died leaving the following
properties and deductions:
Phils. Abroad
Exclusive Property of Mr. Ko (other than family home) P1,000,000 P 500,000
Common Property 2,500,000 800,000
Family home (75% common) 1,500,000 -
Funeral expenses 250,000 50,000
Judicial expenses 100,000 20,000
Vanishing deduction on exclusive property 120,000
Transfer for public use on common property 80,000
Medical expenses of Mr. Ko’s children 120,000
Determination of Estate Tax
Bebe Ko, a married nonresident alien decedent died leaving the
following properties and deductions:
Phils. Abroad
Exclusive Property of Mr. Ko (other than family home) P1,000,000 P 500,000
Common Property 2,500,000 800,000
Family home (75% common) 1,500,000 -
Funeral expenses 250,000 50,000
Judicial expenses 100,000 20,000
Vanishing deduction on exclusive property 120,000
Transfer for public use on common property 80,000
Medical expenses of Mr. Ko’s children 120,000
Determination of
Foreign Tax Credit
Sam Bilbil, a married Filipino decedent died leaving the following
information:
Net Taxable Estate Estate Tax Paid
USA P2,200,000 180,000
Korea 1,375,000 200,000
Philippines 1,925,000
Compute Mr. Bilbil’s estate tax payable.
Determination of
Foreign Tax Credit
Sam Bilbil, a married Filipino decedent died leaving the following
information:
Net Taxable Estate Estate Tax Paid
USA P2,000,000 100,000
Korea 1,500,000 180,000
Philippines 2,500,000
Compute Mr. Bilbil’s estate tax payable.
Mang Jose, an unmarried Filipino decedent died leaving the
following properties and deductions. Compute estate tax payable
Phils. Abroad
Real property (other than family home) P1,000,000 P 500,000
Family home 1,500,000 -
Personal property 180,000 320,000
Funeral expenses 150,000 60,000
Judicial expenses 180,000 40,000
Indebtedness 30,000 150,000
Losses 60,000 50,000
Medical expenses 200,000 100,000
Estate tax paid ? 10,000
Bebe Ko, a married resident alien decedent died leaving the
following properties and deductions:
Phils. Abroad
Exclusive Property of Mr. Ko (other than family home) P1,000,000 P 500,000
Common Property 2,500,000 500,000
Family home (75% common) 1,500,000 -
Funeral expenses 300,000 -
Judicial expenses 100,000 20,000
Vanishing deduction on exclusive property 120,000
Transfer for public use on common property 80,000
Medical expenses of Mr. Ko before his death 375,000 250,000
Estate tax paid ? 15,000
Compute estate tax payable
Estate Tax Requirements
•Notice of death
–The executor, administrator, or any of the legal heirs, as the case
may be, within two months after the decedent’s death or within
a like period after qualifying as such executor or administrator
shall give a written notice of the death to the Commissioner.
–Notice of death is required when
• The estate is subject to tax
• Even if exempt if the gross estate exceeds P20,000
Estate Tax Requirements
•Estate Tax Return and Contents
–The executor, administrator, or any of the legal heirs shall file an
estate tax return under oath in duplicate, setting forth the
following:
• Value of gross estate at the point of death, or in the case of
nonresident alien, the part of his gross estate situated in the
Philippines
• The deductions allowed from gross estate
• Supplemental data which may be necessary to establish the
correct tax
Estate Tax Requirements
•Estate Tax Return and Contents
–Estate tax return is required when
• The estate is subject to tax
• Even if exempt if the gross estate exceeds P200,000
• Regardless of value of the estate, where said estate consists
of registered or registrable property such as real property,
motor vehicles, shares of stocks and similar properties for
which BIR clearance is required to transfer ownership
Estate Tax Requirements
•CPA Certification
– Where the value of the gross estate exceeds P2,000,000, the return shall
be accompanied by a statement certified by a Certified Public Accountant.
•Deadline of Estate Tax Return
– Within 6 months from the date of death. The Commissioner is authorized
to grant, in meritorious cases, a reasonable extension not exceeding 30
days.
Donor’s Tax
Donation
•Donation is the gratuitous transfer of property from one
person to another. Donation shall be subject to donor’s tax.
•Donation inter-vivos VS donation mortis causa
•Essential Requisites of Donation
• Capacity of the donor
• Intention to donate
• Donative act or delivery
• Acceptance by the donee
Donation
•Formal requisites of donations
• Real properties must be in a public instrument
• Intangible personal properties must be in a public instrument
• Tangible personal properties must be in writing if value exceeds P5,000. if
value is P5,000 and below it may be made orally.
•Type of donors
• Residents or citizens
• Nonresident alien
Donation
•Type of donees
• Relatives
• Strangers
•Donor’s tax model
Gross gift xxx
Less: deductions xxx
Net gift xxx
•Taxation of donation
• Progressive tax or donor’s tax table – donations made to relatives
• 30% proportional tax – donations made to strangers