This is a follow up article of my blog post “Estate Tax in the Philippines under Train Law”.
You should read this if want to know what are the Allowable Deductions in the Gross Estate of the Decedent so that you can minimize Estate Tax of the Decedent Legally.
Below are the allowable deductions deducted to the Gross Estate of the Decedent:
1. Standard Deduction
2. Claims Against the Estate
3. Claims of the deceased against insolvent persons
4. Unpaid Mortgages, Taxes and Casualty losses
5. Property Previously Taxed
6. Transfer for Public Use
7. The Family Home
8. Amount received by heirs under Republic Act No. 4917
9. Net Share of Surviving Spouse in the Conjugal Partnership or Community
1. Standard Deduction
If the Decedent is either a Citizen or Resident of the Philippines,
A deduction in the amount of Five Million (P5,000,000) shall be allowed without the need of substantiation.
If the Decedent is a Non-Resident Alien,
Only Five Hundred Thousand Pesos (P500,000) shall be allowed without need of substantiation.
2. Claims Against the Estate
Claims against the estate or indebtedness in respect of property may arise out of:
a) Contract
b) Tort
c) Operation of Law
A. What are the Requisites for Deductibility of Claims against the Estate?
a) The liability represents a personal obligation of the deceased existing at the time of his death
b) The liability was contracted in good faith and for adequate and full consideration in money
c) The indebtedness must not have been condoned by the creditor.
B. What are the Substantiation Requirements of Claims Against Estate?
a) Except for loans granted by financial instruction, the debt instrument like promissory note or contract of loan must be duly notarized.
b) If the unpaid obligation arose from the purchase of goods or services,
Substantiate by showing evidence of the purchase of goods or service, such as sales invoice, delivery receipt, contract for the services, and statement of account given by the creditor as duly received by the decedent debtor.
c) Duly notarized Certification from the creditor as to the unpaid balance of debt, including interest as of the time of death:
> If the creditor is a corporation, the sworn certification must be signed by the (i) President, (ii) Vice President, or (iii) other principal officer of the corporation.
> If the creditor is a partnership, the sworn certification should be signed by any of the general partners.
> If the creditor is a bank or other financial institutions, the Certification shall be executed by the branch manager of the bank that monitors and manages the loan of the decedent-debtor.
> If the creditor is an individual, the sworn certification should be signed by him.
C. When the lender is the relative of the debtor within fourth civil degree, either by consanguinity (blood) or affinity (marriage),
A copy of the promissory note or other evidences of indebtedness must be filed with the RDO having jurisdiction over the borrower within fifteen days from the execution thereof.
a. Requirements prescribed in existing or prevailing internal revenue issuances:
(i) Proof of financial capacity of the creditor to lend the amount at the time the loan was granted.
(ii) Latest audited balance sheet with a detailed schedule of its receivable showing the unpaid balance of the decedent-debtor. In case the creditor is an individual who is no longer required to file income tax return, a duly notarized Declaration by the creditor of his capacity to lend at the time.
(iii) If the Creditor is a non-resident citizen, the executor/administrator or any of the legal heirs must submit a duly notarized declaration of the creditor of his capacity to lend at the time when loan is granted, authenticated or certified to as such by the tax authority of the country where non-resident is a resident.
3. Claims of the deceased against insolvent persons
Claims of deceased against insolvent persons as defined under R.A. 10142, where the value of the decedent’s interest therein is included in the value of the gross estate.
4. Unpaid Mortgages, Taxes and Casualty losses
A. In case unpaid Mortgages is being claimed by the estate, verification must be made as to who was the beneficiary of the loan proceeds.
The value of the unpaid loan must be included as a receivable of the estate.
B. Taxes which have accrued as of the death of the decedent which were unpaid as of the time of death.
This deduction will not include:
a) Income Tax received after death
b) Property Tax not accrued before death
c) Estate Tax due from transmission of his estate
C. Casualty Losses arising from fires, storms, shipwreck, other casualties, robbery, theft or embezzlement provided that:
a) Losses are not compensated for by insurance,
b) Losses have not been claimed as a deduction for income tax purpose, and
c) Losses were incurred not later than the last day for the payment.
D. How to Compute the Allowable Deduction in Total Losses and Indebtedness of a Decedent Who is a Non- Resident Alien of the Philippines?
If the Decedent is a Non-Resident Alien, the Allowable Deduction in
a. Claim against the estate
b. Claims of the deceased against insolvent persons where the value of interest therein is included in the value of the gross estate
c. Unpaid mortgages, taxes and casualty losses
Shall be computed using the following formula:
Phil. Gross Estate ÷ World Gross Estate
x (Total Losses and Indebtedness)
= Allowable Deduction
5. Property Previously Taxed
These deduction shall be allowed only where a donor’s tax or estate tax was finally determined and paid by or on behalf of such donor, or the estate of such prior decedent.
a. One hundred percent (100%) of the Value if the prior decedent died within one (1) year prior to the death of the decedent, or if the property was transferred to him by gift, within the same period.
b. Eighty percent (80%) of the Value if the prior decedent died more than one (1) years but not more than two (2) years prior to the death of the decedent, or if the property was transferred to him by gift, within the same period.
c. Sixty Percent (60%) of the Value if the prior decedent died more than two (2) years but not more than three (3) years prior to the death of the decedent, or if the property was transferred to him by gift, within the same period.
d. Forty Percent (40%) of the Value if the prior decedent died more than three (3) years but not more than four (4) years prior to the death of the decedent, or if the property was transferred to him by gift, within the same period.
e. Twenty Percent (20%) of the Value if the prior decedent died more than four (4) years but not more than five (5) years prior to the death of the decedent, or if the property was transferred to him by gift, within the same period.
Where a deduction has lien on the property, the property previously taxed shall be reduced by the amount of mortgage.
Where property referred to consist of two (2) or more items, the aggregate value of such items shall be used for the purpose of computing the deduction.
6. Transfer for Public Use
The amount of all bequest, legacies, devises or transfer to or for the use of the Government of the Philippines for public purposes.
7. The Family Home
The Family Home is the dwelling house and lot where husband, wife, or head of the family and member of their family reside.
Unmarried Head of a Family is an unmarried or legally separated man or woman living with parents, siblings, and/or children that is dependent upon him or her for their chief support.
Where such brothers, sisters or children are:
a. Not more than 21 years of age
b. Unmarried
c. Not gainfully employed
d. Incapable of self-support because of mental or physical defect
A. What are the Conditions for the allowance of family home as deduction from the gross estate?
a. The family home must be the actual residential home of the decedent and his family at the time of his death, as certified by the Barangay Captain where the family home is situated.
b. The total value of the family home must be included as part of the gross estate of the decent.
c. Allowable deduction must be equivalent to the fair market value of the family home, or the extent of the decedent interest (whether conjugal/community or exclusive property) whichever is lower, but not exceeding P10,000,000.
For the purpose of availing of a family home deduction, a person may constitute only one (1) family home.
8. Amount received by heirs under Republic Act No. 4917
Any amount received by the heirs from the decedent’s employer as a consequence of the death of the decedent-employee is allowed as a deduction
Provided that the amount of the Separation Benefit is included as part of the gross estate of the Decedent.
9. Net Share of Surviving Spouse in the Conjugal Partnership or Community
After deducting the allowable deductions to the conjugal or community properties included in the gross Estate,
The Share of the surviving spouse must be removed to ensure that only the decedent’s interest in the estate is taxed.
References:
Consolidated Revenue Regulations on Estate Tax and Donor’s Tax Incorporating the Amendments Introduced by TRAIN Law (RR 12-2018)
Wait, there’s more.
If you want to see sample of the Proper Presentation of the Family Home and Standard Deduction as Deductions from the Gross Estate, click here.
What’s Next?
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