Monday, October 6, 2014

DEDUCTIONS FROM THE GROSS ESTATE (Citizen and/or Resident Decedents)

 A.       ELITE (Expenses, Losses, Indebtedness, Taxes, etc.)
  1. Funeral expenses
Actual Funeral expenses or 5% of the gross estate, whichever is lower, provided it does exceed P 200,000, shall be allowed as a deduction from the gross estate (common property, if applicable) of the decedent.  To be considered actual, the funeral expenses must be paid out of the estate, not by somebody or out of contributions from friends and relatives.  Supporting receipts or invoices or other evidence shall also be furnished.

Example of Funeral Expenses:
a)       mourning clothes (surviving spouse and unmarried minor children only)
b)      expenses of the wake preceding the burial including food and drinks
c)       fees for religious rites and ceremonies prior to interment
d)     cost of burial plot, tombstone, mausoleum but not their upkeep.  In case the deceased   owns a family estate or several burial lots, only the value corresponding to the plot   where he is buried is deductible.
e)       Publication and telecommunication charges for death notices
f)        interment and/or cremation charges

  1. Judicial expenses
Judicial expenses refer to expenses of testamentary or intestate proceedings for the benefit of the estate, incurred during settlement of the estate supported by receipts or invoices or by a sworn statement of account issued and signed by the creditor in case of unpaid amounts.  Settlement period means not beyond the last day prescribed by law to file the estate tax return (6 months from death) or the extension thereof.

Example of Judicial Expenses:
a)       Actual judicial or court expenses
b)      Attorney’s fees
c)       Expenses of administration such as, but not limited to
-  Inventory taking of assets comprising the gross estate
-  Payment of debts of the estate
-  Distribution of the estate among the heirs.
-  Accountant’s fees
-  Fees of executor/administrator
-  Appraiser’s fees
-  Clerk’s hire
-  Cost of preserving and distributing the estate
-  Cost of string or maintaining the property of the estate
-  Brokerage fees

  1. Indebtedness or Claims against the Estate
      These are debts or demands of pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to simple money terms.  The liability represents a personal obligation  of the deceased existing at the time of his death. The liability was contracted in good faith and for adequate and full consideration in money or money’s worth

Requisites in order to be allowed as a deduction:
a.        Must be valid in law and enforceable in court against him when he was alive
b.       It must not have been condoned by the creditor or the action to collect from the decedent must not have been prescribed.
c.        If with a debt instrument, it must be notarized, except for loans granted by financial institutions where notarization is not part of the business practice/policy of the financial institution-lender.
d.       If contracted within three (3) years before the death of the decedent, a statement under oath (by the executor/administrator) must be executed and must be attached therewith a statement showing the disposition of the proceeds of the loan. 

The following Unpaid Expenditures shall not be deductible from the gross estate under this category
a)       Funeral expenses
b)      Medical expenses

  1. Claims against an insolvent person
        These are claims that are not collectible.  An insolvent is person whose properties are not sufficient to satisfy, whether fully or partially, his debts.  For purposes of estate taxation, a judicial declaration of insolvency is not required but the incapacity of the debtors to pay their obligation should be proven.  To be allowed as a deduction from the Gross Estate, the full amount owed by the insolvent must first be included in the decedent’s Gross Estate.  If the insolvent could only pay partial, the full amount owed shall be included in the Gross Estate, and the amount uncollectible shall be allowed as a deduction.

  1. Unpaid mortgages or indebtedness on property
      This is a deduction allowed when the decedent leaves property encumbered by a mortgage or indebtedness contracted in good faith and for adequate and full consideration.  To be allowed as a deduction, his gross estate must include the fair market value of the property encumbered.  The amount allowed as a deduction would be the outstanding debt or mortgage.

  1. Taxes
     These are unpaid taxes that accrued prior to the death of the decedent.  However, the following are not allowed as a deduction:
a)       Income tax on income received after death
b)      Property taxes accrued after death
c)       Estate tax

  1. Losses
Include all losses incurred during the settlement of the estate arising from fires, storms, shipwreck or other casualties, or from robbery, theft or embezzlement.  The amount deductible is the value of the property lost.

Requisites to be allowed as a deduction:
a)       arising exclusively from:
a.        acts of God: fire, storm, shipwreck and other similar casualty
b.       acts of man:  robbery, theft, embezzlement
b)      not compensated by insurance or otherwise
c)       not claimed as a deduction in an income tax return of the estate subject to income tax
d)      occurred during the settlement of the estate and
e)       occurred before the last day for the payment of estate tax (six months after the death of the decedent)

B.       TRANSFERS FOR PUBLIC USE
*  Dispositions in a last will and testament or transfers to take effect after the death in favor of the:
1.       government of the Philippines
2.       any political subdivision thereof (e.g. barangay, province, city municipality)
*  for exclusively public purposes

C.       VANISHING DEDUCTION
*  Referred to as a deduction for “property previously taxed” in the Tax Code
*  It is an amount allowed to reduce the taxable estate of a decedent where the property:
1.       received by him from a prior decedent by gift, bequest, device or inheritance
2.       transferred to him by gift
3.       Has been the object of previous transfer taxation

*  Requisites for deduction:
1.       death – the present decedent died within 5 years from the date of death of the prior decedent or date of gift
2.       identity of property – the property with respect to which deduction is sought can be identified as the one received from the prior decedent, or from the donor, or as the property acquired in exchange for the original property so received
3.       located in the Philippines – the property on which vanishing deduction is being claimed must be located in the Philippines
4.       inclusion of the property – the property must have formed part of the gross estate situated in the Philippines of the prior decedent or have been included in the total amount of the gifts of the donor made within 5 years prior to the present decedent’s death
5.       previous taxation of the property – the estate tax on the prior succession, or the donor’s tax on the gift must have been finally determined and paid by the prior decedent or by the donor as the case maybe and
6.       no previous vanishing deduction on the property – no such deduction on the property, or the property given in exchange therefore, was allowed in determining the value of the net estate of the prior decedent.

                Pro-forma computation of vanishing deduction:
Value to take***
Pxx
Less: Paid mortgage (1st deduction)
(xx)
Initial basis
xx
Less: Proportionate expenses(2nd deduction):


Initial basis
x
ELITE plus transfer for public use
Gross estate


(xx)
Final basis
xx
x   vanishing deduction percentage
%
Vanishing Deduction
Pxx

        ***Value to take is the lower amount between the value of the property in the gross estate of the prior decedent or value of the gift and value of the same property  in the gross estate of the present decedent.

                Vanishing deduction rates:
                If the period from receipt to decedent’s death is                Rate %
                                Within one year                                                        100
                                Beyond one year to 2 years                                        80
                                Beyond 2 years to 3 years                                          60
                                Beyond 3 years to 4 years                                          40
                                Beyond 4 years to 5 years                                          20

D.      Amounts received by heirs 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 R.A. No. 4917, provided that the amount of separation benefit is included as part of the gross estate of the decedent.

E.       Standard deduction
*  The law allows a standard deduction of P 1,000,000; no qualification, condition nor requisite whatsoever.

F.       Family Home
*  Requisites for deduction:
1.       the decedent was married or if single, was a head of the family
2.       along with the decedent, either of the following persons must be dwelling in the family home:
a.        spouse
b.       parents or ascendants
c.        children or descendants
d.       brothers and sisters
3.       the family home as well as the land on which it stands must be owned by the decedent.  Therefore, the FMV of the family home should have been included in the computation of the decedent’s GE.
4.       the Barangay captain of the locality where it is located must certify it as a family home.

*  The amount of family home allowable as a deduction would be whichever is lower of:
1.       P 1,000,000 or
2.       FMV, at the time of the decedent’s death, of the family home and the land on which it stands

G.       Medical expenses
*  Requisites for deduction:
1.       incurred by the decedent within 1 year prior to his death and
2.       substantiated by receipts
*  The amount allowed as a deduction would be whichever is lower of:
1.       actual medical expenses incurred by the decedent
2.       P 500,000


H.      Share of Surviving Spouse

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