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1. Ordinary deductions
(a) Expenses, losses, indebtedness, taxes, etc.
(1) Funeral expenses;
(2) Judicial expenses of testamentary or intestate proceedings;
(3) Claims against the estate;
(4) Claims against insolvent persons;
(5) Unpaid mortgage or indebtedness of the property;
a. Taxes
b. Losses.
(b) Transfer for public use;
(c) Vanishing deduction;
2. Special deductions
(a) Family home;
(b) Standard deductions;
(c) Medical expenses
(d) Amount receivable by heirs under RA No. 4917
Items 2(a), 2(b), and 2(c) are not available to the estate of a non-resident, not
citizen of the Philippines.
FUNERAL EXPENSES
Funeral expenses paid or unpaid from the estate, are deductible at the actual
expenses, or 5% of the gross estate, or P200,000, whichever is the lowest.
The cut-off point is internment. Expenses incurred after internment are not included
in the funeral expenses.
JUDICIAL EXPENSES
Deductions for judicial expenses in the settlement of the estate in or out of the
court are allowed if incurred within six months from the date of death.
Insolvent persons have two kinds of creditors, preferred and ordinary. Preferred
creditors will first be paid in full from the properties (e.g. the Government for unpaid
taxes) and the balance of the properties will be divided proportionately to the
ordinary creditors.
Claims against insolvent persons are deductions from the gross estate. The full
amount of the receivables are added to the gross estate and the uncollectible
portions shall be included in the deductions from the gross estate.
The gross estate must include the fair market value of the property, undiminished
by the mortgage or indebtedness. The mortgage or indebtedness will then be
claimed as a deduction from the gross estate.
TAXES
LOSSES
Deduction from the gross estate through a last will and testament, or transfer to
take effect after death, in favor of the Government of the Philippines, or any political
subdivision thereof, exclusively for public purpose.
VANISHING DEDUCTION
Property may change hands within a very short period of time by reason of an early
death of the owner who received it by inheritance or gift. This becomes too heavy a
burden because for every transfer of property it is subjected to tax.
1. The present decedent died within 5 years from the receipt of property from a
prior decedent or donor.
2. The property on which vanishing deduction is being claimed must be located
in the Philippines.
3. The property must formed part of the taxable estate of the prior decedent, or
of the taxable gift of the donor;
4. The estate tax on the prior succession or the donors tax on the gift must
have been finally determined and paid;
5. The property on which vanishing deduction is being claimed must be
identified as the one received from the prior decedent, or from the donor, or
something acquired in exchange therefor;
6. No vanishing deduction on the property was allowable to the estate of the
prior decedent.
1. The initial value to take as the basis of the vanishing deduction is the value of
the property in the prior estate (or value used for donors tax purposes), or
the value of such property in the present estate, whichever is lower. Where
the property referred to consists of two or more items, the aggregate of the
item by item lower of two values shall be the initial basis.
2. The value in (1) shall be reduced by any payment made by the present
decedent on any mortgage or lien on the property where such mortgage or
lien was a deduction from the gross estate of the prior decedent, or gift of the
donor;
3. The value in (2) shall be further reduced by:
Example: Ms. Jane inherited a piece of land and a car from her father on May 18,
2008. The estate tax was paid on the fair market value of P1,200,000 for the land
and P400,000 for the car. At the time she inherited the land, it was subject to a
mortgage of P100,000. During her lifetime she paid P80,000 on the mortgage
indebtedness. On December 14, 2011, Ms. Jane died. Included in her gross estate of
P6,000,000 were the land and the car that she inherited from her father. On
December 14, 2011, the land had a fair market value of P1,400,000 and the car
had a fair market value of P380,000. Ordinary deductions amounted to P900,000.
How much would be the vanishing deduction?
Solution:
Vanishing deduction:
11- 12 - 25
08 5 18
3- 7 - 07 or 40% of P1,200,000 P480,000
FAMILY HOME
A family home is the dwelling house where the decedent and his family reside, and
the land on which it is situated. Within the meaning of family are the spouse,
parents, ascendants, descendants, brothers and sisters, who are living in the family
home and who depend upon the head of the family for support.
The deduction for family home is an amount equivalent to the current fair market
value of the decedents family home. The maximum is one million pesos
(P1,000,000).
The deduction from the gross estate for family home shall be allowed when the
family home is certified as such by the Barangay Captain of the locality where it is
located.
STANDARD DEDUCTION
The gross estate of every decedent who was a citizen or resident of the Philippines
always has a standard deduction of P1,000,000.
MEDICAL EXPENSES
Deductions from the gross estate is allowed for medical expenses, whether paid or
unpaid at the time of death, incurred by the decedent within one year prior to his
death, if substantiated with receipts. The deduction for medical expenses shall not
exceed P500,000.
A decedent shall be subject to estate tax only for his estate in the Philippines.
Deductions are:
Example: Mr. James, a citizen and resident of USA, single, died leaving a gross
estate of P1,200,000 in the Philippines, and P2,400,000 in USA. Expenses, losses,
indebtedness, taxes and other ordinary deductions in the Philippines amounted to
P600,000 while in the USA incurred ordinary deductions amounting to P900,000.
The deductions from the Philippines gross estate are as follows:
Deduction:
P1,200,000/P3,600,000 x P1500,000 P500,000
Problem 1:
Mr. A, a citizen of the Philippines, died with a gross estate of P8,000,000 and the following expenses
related to his death.
A memorial plan was purchased by the decedent for P200,000, and the seller fulfilled its obligations
under the plan.
Problem 2:
Mr. A, a citizen of the Philippines with gross income within and outside the Philippines, died on March 1,
2010. The following information were given among others to determine the amount deductible:
Problem 3:
How much is the deduction from the gross estate for claims against insolvent persons?
Problem 4:
Mr M died single, leaving properties, among which was property that he inherited three and one half
years before. At the time he inherited the property it had a fair market value of P1,100,000 and mortgage
of P100,000. The fair market value of the property in the present estate is P2,000,000 and the mortgage
indebtedness was paid in full by Mr. M. The gross estate of Mr M is P4,000,000, and allowable
deductions not including vanishing deduction and standard deduction is P400,000. How much is the
vanishing deduction?
Problem 5:
Mr B died leaving property that he inherited one and one-half years ago, as follows:
The property inherited had fair market value at the time received as follows:
Ordinary deductions from the gross estate not including the vanishing deduction, had a total of
P2,000,000.
Problem 6
Mr. C died leaving a gross estate of P5,000,000, in which are included property and cash received as gift
within the year of P550,000 and P500,000, respectively. At the time the property was received as gift, it
had a fair market value of P450,000, with an unpaid purchase price of P50,000. Mr. C paid the unpaid
purchase price. Ordinary deductions from his gross estate, not including vanishing deduction, had a total
of P1,500,000. How much is the vanishing deduction?
Problem 7
Mr. D died leaving the properties, with fair market values, that follow:
Property inherited two and one-half years ago (fair market value was P1,000,000) P1,200,000
Property received as a gift 2 years ago (fair market value when received was P800,000 500,000
Other properties in the gross estate 3,300,000
Ordinary deduction from the gross estate, not including vanishing deduction, had a total of P1,200,000.
How much is the vanishing deduction?
Problem 8
The decedent was a citizen of the Philippines who died from an illness on December 25, 2007. Item of
expenses in the hospital were:
Problem 9
The decedent was a citizen of the Philippines who died on November 1, 2010 from a lingering illness.
Medical expenses were incurred:
Problem 10
There was a legacy of P2,000 to the Government of the Philippines, and of P3,000 to
the Society for the Blind, a charitable institution.
Problem 10
The decedent was a citizen and resident of the Philippines, single, head of the
family, who died one and half years after he inherited property from his father. At
the time of death, the following were the data pertinent to the computation of the
estate tax:
How much is the total of the deductions from the gross estate?