Computation Of Taxable Income For Individuals (2024)

To compute your taxable income in the Philippines, you first need to determine your gross income from all sources like salaries, allowances, and business income. Then, subtract specific deductions, including mandatory contributions to social security programs (SSS, Pag-IBIG, PhilHealth). You may also be eligible for deductions based on your filing status and dependents. The resulting amount is your taxable income, which is then used to determine your tax liability according to the government’s graduated tax table.

Gross Income and Various Types of Income Receipts

From the perspective of income taxation, gross income refers to the total value of all financial benefits you receive in a tax year before any deductions or withholdings. It’s essentially the entire amount you earn, regardless of the source.

Here’s a breakdown of key points about gross income for income tax purposes:

Scope

It encompasses income from various sources, including:

• Wages and Salaries:This includes your regular pay, bonuses, commissions, and overtime earnings.
• Business Income:Profits earned from your sole proprietorship, partnership, or corporation.
• Investment Income:Interest earned on savings accounts, dividends from stocks, and capital gains from selling assets.
• Rental Income:Income received from renting out property.
• Other Income:Royalties, prizes (except tax-exempt ones), and any other form of compensation.

Exclusions

Certain types of income might be excluded from gross income, depending on specific tax laws. These exclusions can vary by country but might include gifts, inheritances, and certain social security benefits

Importance

Gross income serves as the starting point for calculating your taxable income. Taxable income is what remains after subtracting allowable deductions from your gross income. It’s the taxable income that determines your tax liability according to the government’s tax brackets.

In essence, gross income represents the entirety of your financial gains before the government takes its share through income tax.

What constitutes income for tax purposes in the Philippines?

For Philippine income tax purposes, anything that enriches you and can be measured in terms of money is considered income. Here’s a breakdown of what constitutes income in the Philippines:

Sources of Income:

• Compensation Income:This includes salaries, wages, bonuses, and allowances (except de minimis benefits) you receive from your employment.
• Business and Professional Income:Profits generated from your business operations or professional practice.
• Investment Income:Interest earned on savings accounts, dividends received from stocks, and capital gains from selling investments.
• Rental Income:Income you earn from renting out properties.
• Other Sources:Royalties, winnings (except tax-exempt ones), and any other form of compensation or remuneration.

Different Types Of Income

Compensation Income

Compensation income refers to the financial rewards you receive as an employee in exchange for your services. It’s essentially the monetary value your employer assigns to your work, and it forms a key part of your gross income for tax purposes.

Types of Compensation Income

Here’s a breakdown of different categories of compensation income for tax purposes in the Philippines:

• Basic Salary and Wages:This is your regular fixed pay received for performing your job duties.
• Bonuses:One-time payments from your employer on top of your regular salary, often given for performance, reaching targets, or during holidays.
• Commissions:Earnings based on your sales performance or achievements, typically a percentage of the total sales you generate.
• Allowances (except de minimis benefits):Monetary amounts your employer provides to cover work-related expenses like transportation, clothing, or meals. However, minimal benefits, like trivial gifts or allowances with a minimal value, are excluded from taxable income.
• Overtime Pay:Earnings for working beyond your regular scheduled hours, typically at a higher rate.
• Profit Sharing:A portion of the company’s profits distributed to employees based on a predetermined formula.
• Monetized Vacation Leave (in excess of 10 days):The cash equivalent of unused vacation leave exceeding the mandated 10 days is considered taxable income.
• Sick Leave Pay:Payments received while on approved sick leave are generally included in taxable income.
• Hazard Pay:Extra compensation provided to employees working in hazardous or dangerous conditions.
• Taxable 13th Month Pay:The mandatory 13th month pay in the Philippines is taxable income.
• Other Forms of Remuneration:Any other payment received within the employer-employee relationship that qualifies as compensation for your services.

Business Income

In the context of Philippine income tax, business income refers to the net profit generated by your business or professional practice after all allowable expenses have been deducted from your gross revenue.

Here’s a breakdown:

• Gross Revenue:This is the total amount of income your business earns from selling goods or services.
• Allowable Expenses:These are the ordinary and necessary costs you incur to operate your business. Examples include rent, salaries for employees, utilities, supplies, and marketing expenses.
• Business Income (Taxable Income):It’s calculated by subtracting allowable expenses from your gross revenue. This net profit amount is what gets taxed by the Philippine government.

Sources Of Business Income

While the Philippine tax code doesn’t categorize business income itself, business income can be broadly grouped based on the source of income within your business activities. Here are some common categories:

1. Sales of Goods: This is the most straightforward category and refers to the profit earned from selling products in your business. It’s calculated by subtracting the cost of goods sold (COGS) and other related expenses from your sales revenue.
2. Services Rendered: This category applies to businesses that provide services for a fee. The income here is the difference between the fees charged for your services and the expenses incurred in delivering those services (e.g., salaries for service providers, equipment rentals).
3. Interest Income: This includes any interest earned on business-related deposits or investments, such as interest from a business bank account.
4. Rental Income: If your business owns properties that are rented out, the income received from tenants falls under this category. Remember, expenses associated with maintaining the rental property can be deducted.
5. Royalties: Income received for allowing others to use your intellectual property, such as patents, copyrights, or trademarks, falls under royalties.
6. Capital Gains: Profits earned from the sale of business assets, like equipment or property, are considered capital gains. Tax treatment of capital gains can differ from regular business income in some cases.

Professional Income

In the Philippine income tax system, professional income is a subcategory of business income specifically referring to the net profit earned by an individual engaged in the practice of their profession. Here’s a breakdown of the key points:

Core Concept:

• Professional income is the profit, after deducting allowable expenses, generated by a professional from their practice.
• It falls under the broader category of business income for tax purposes.

Who Qualifies as a Professional?

• Individuals registered with a professional regulatory body recognized by the Philippine government, such as doctors, lawyers, engineers, accountants, and architects.
• Some interpretations extend the concept to include artists and other individuals who pursue a specialized skill and offer services directly to clients.

Taxation:

• Professionals are consideredself-employedfor tax purposes.
• They are subject to income tax on theirnet professional income, similar to how business owners are taxed on their net business income.
• TheSimplified Net Income Taxation Scheme (SNITS)offers a simplified tax filing process for professionals with annual gross receipts below a certain threshold.

Key Differences from Business Income:

• While both are taxed similarly, business income might encompass a wider range of activities beyond just providing professional services.
• Professionals typically wouldn’t have the same level of overhead expenses compared to a larger business operation.

Passive Income

Passive income refers to income that you earn with minimal ongoing effort. It’s like money growing on a tree – it continues to flow in even if you’re not actively working for it. The key characteristics of passive income, according to the Bureau of Internal Revenue (BIR), are that it requires little to no active participation to maintain and generates a continuous stream of income over time [1].

Here are some examples of passive income:

• Interest earned on savings accounts [1].
• Dividends received from stocks [1].
• Rental income from properties you own [1].
• Royalties from intellectual property, such as patents or copyrights [1].
• Earnings from online businesses that operate with minimal ongoing management (e.g., automated affiliate marketing websites) [1].

Taxation of Passive Income in the Philippines

The Philippines taxes passive income differently from earned income like salaries. Passive income is subject to a flat rate rather than the progressive tax brackets used for salaries. The BIR website states that most passive income in the Philippines is currently taxed at a 7.5% rate [1]. This applies to:

• Interest income (e.g., from bank deposits) [1].
• Dividends from corporations registered in the Philippines [1].
• Capital gains on the sale of shares of stock traded in the Philippines (subject to certain exemptions) [1].

Important Considerations

• It’s important to stay updated on any changes to tax laws, as tax rates and regulations can be subject to revisions [1].
• Consulting a tax professional is highly recommended to ensure you understand the specific tax implications of your passive income sources in the Philippines [1].

Source: [1] Bureau of Internal Revenue (BIR): https://www.bir.gov.ph/

Other Income

Here are some examples of other income that are taxable in the Philippines:

• Prizes (except tax-exempt ones):Winnings from contests, games shows, and gambling (except winnings from the Philippine Charity Sweepstakes Office (PCSO) lotto) are generally considered taxable income [1].
• Royalties (except those exempt by law):Income received for allowing others to use your intellectual property, like patents, copyrights, or trademarks (unless specifically exempt) falls under royalties and is taxable [1].
• Gains from the sale of personal assets (except tax-exempt ones):Profits earned from selling personal properties, like artwork or collectibles, might be taxable depending on the nature of the asset and holding period [2].
• Per diems and allowances exceeding reasonable limitations:Per diems and allowances provided by employers for travel, meals, or other work-related expenses are generally tax-exempt up to a certain limit set by the BIR. Amounts exceeding this limit might be considered taxable income [3].
• Government pensions (except exempt ones):While some government pensions might be exempt from tax, others are considered taxable income [4].
• Cancellation of Debt:If someone cancels a debt you owe them (except for student loans under certain conditions), the forgiven amount can be considered taxable income [5].

Resources:

• [1] Bureau of Internal Revenue (BIR):https://www.bir.gov.ph/index.php/tax-code.html
• [2] BIR Revenue Regulation (RR) 05-2019:https://www.bir.gov.ph/index.php/revenue-issuances/revenue-regulations.html(This regulation provides details on capital gains tax)
• [3] BIR Revenue Memorandum Order (RMO) 49-2008:https://www.bir.gov.ph/index.php/revenue-issuances/revenue-memorandum-orders.html(This order clarifies tax treatment of allowances)
• [4] BIR: Rules and Regulations on Income Taxation (downloadable document):https://www.bir.gov.ph/index.php/tax-code.html(This document provides comprehensive information on income taxation)
• [5] Philippine Tax Law:https://chanrobles.com/legal6.htm(This website offers information on the cancellation of debt and its tax implications)

Taxable vs. Non-Taxable Income in the Philippines

The Philippine tax system classifies income into taxable and non-taxable categories. Understanding this distinction is crucial for accurate tax filing. Here’s a breakdown:

Taxable Income:

This refers to all income derived from various sources that are subject to income tax in the Philippines. Here are some common categories:

• Compensation Income:Salaries, wages, bonuses, allowances (except de minimis benefits) received from employment. (Source: BIR websitehttps://www.bir.gov.ph/)
• Business Income:Profits generated by your business or professional practice after deducting allowable expenses. (Source: BIR websitehttps://www.bir.gov.ph/)
• Investment Income:Interest earned on savings accounts, dividends from stocks, and capital gains (profits) from selling investments (may have specific tax rates). (Source: BIR websitehttps://www.bir.gov.ph/)
• Rental Income:Income received from renting out properties (minus allowable deductions). (Source: BIR websitehttps://www.bir.gov.ph/)
• Passive Income:Income earned with minimal ongoing effort, like interest, dividends, or royalties (usually taxed at a flat rate). (Source: BIR websitehttps://www.bir.gov.ph/)
• Other Taxable Income:This broad category includes prizes (except tax-exempt ones), royalties (except exempt ones), gains from selling personal assets (depending on type and holding period), per diems exceeding reasonable limits, certain government pensions, and forgiven debt. (Source: BIR websitehttps://www.bir.gov.ph/, BIR regulationshttps://www.bir.gov.ph/index.php/tax-information/capital-gains-tax.html,https://www.bir.gov.ph/index.php/search.html?searchword=de%20minimis%20benefit&searchphrase=all)

Non-Taxable Income:

While most income is taxable, there are some exemptions:

• Gifts:Gifts received from individuals generally are not taxable unless they are excessive in amount and appear to be a disguised form of compensation.
• Inheritance:Money or property inherited is not taxable income.
• Life insurance proceeds:Payments received upon the death of the insured are generally not taxable. (Exceptions may apply depending on the policy)
• Minimum Wage Earners:Individuals earning the minimum wage or less are typically exempt from income tax.
• Specific Allowances:De minimis benefits provided by employers (minimal and trivial benefits) are exempt from tax.
• Government Social Security Benefits:Social security benefits like SSS pensions might be exempt depending on specific circ*mstances.
• Tax-Exempt Securities:Interest earned on certain government-issued securities might be exempt from tax.

Deductions and Allowable Expenses for Individuals

When it comes to filing your income tax in the Philippines, not all your earnings are subject to tax. The good news is you can deduct certain allowable expenses from your gross income to arrive at your taxable income. These deductions, which can include mandatory contributions to social security programs and expenses related to your job or business, help reduce your overall tax liability. Understanding allowable deductions and how they apply to your specific situation can lead to significant savings come tax season.

Purpose Of Deductions

The main purpose of deductions in income for taxation purposes is to provide a fair and equitable tax system. Here’s a breakdown of the key reasons deductions exist:

• Reflecting Ability to Pay:Deductions allow the government to tax only yournet income, which is a more accurate reflection of your ability to pay taxes. Expenses incurred to earn that income are considered a cost of doing business (employment or self-employment) and are not seen as true profit.
• Encouraging Certain Activities:Governments can use deductions to incentivize specific behaviors. For example, deductions for charitable donations might encourage charitable giving.
• Simplifying Tax Code:Deductions help simplify the tax code by allowing taxpayers to subtract specific expenses directly from their income rather than requiring a more complex system of calculating taxable income based on net cash flow after expenses.

Standard Deduction vs. Itemized Deductions in the Philippines: Choosing the Right Option

The Philippine tax system allows individuals to choose between two methods for reducing their taxable income: the standard deduction and itemized deductions. Understanding the differences and how they work is crucial for maximizing your tax benefits.

Standard Deduction:

• Afixed amountis subtracted from your gross income regardless of your actual expenses.
• This is asimpleroption, requiring minimal record-keeping.
• The current standard deduction in the Philippines isnot exceeding 40% of your gross business or professional income.

Itemized Deductions:

• Allows you to deduct theactual amountyou spent on specific allowable expenses throughout the year.
• This requires keeping detailed records of your receipts and documentation.
• Potential deductible expenses include:
  • Mandatory contributions to social security programs (SSS, Pag-IBIG, PhilHealth).
  • Interest on loans used for business or investments (with limitations).
  • Donations to accredited charitable institutions (up to a certain percentage of your income).
  • Medical and dental expenses exceeding a certain threshold.
  • Educational expenses (with limitations).

Choosing the Best Option:

The best option depends on your individual circ*mstances. Generally:

• Choose the standard deduction if:
  • You don’t have many documented expenses exceeding the standard deduction amount.
  • You value simplicity and convenience in tax filing.
• Consider itemized deductions if:
  • Your total documented expenses are likely to exceed 40% of your gross business or professional income.
  • You have significant expenses in categories allowed for itemized deductions (e.g., medical bills or charitable contributions).

Types Of Allowable Deductions

In the Philippine income tax system, individuals don’t have traditional “personal deductions” in the same way some other countries do. Instead, the concept of reducing your taxable income revolves around two main approaches:

1. Standard Deduction: This is a fixed amount subtracted directly from your gross income, regardless of your actual expenses. The current standard deduction is not to exceed 40% of your gross business or professional income. https://www.bir.gov.ph/index.php/tax-information/income-tax.html)]
2. Mandatory Contributions and Allowable Itemized Deductions: While there aren’t separate “personal deductions,” the Philippines allows deductions for specific expenses categorized as mandatory contributions and allowable itemized deductions.

Here’s a breakdown of these categories:

• Mandatory Contributions: These are contributions you are required to make by law and can be deducted from your gross income. Examples include:
  • Social Security System (SSS) contributions Source: BIR Revenue Regulation (RR) No. 1-2012:https://www.bir.gov.ph/index.php/revenue-issuances/revenue-regulations.html
  • Pag-IBIG Fund contributions Source: BIR Revenue Regulation (RR) No. 1-2012:https://www.bir.gov.ph/index.php/revenue-issuances/revenue-regulations.html
  • PhilHealth contributions Source: BIR Revenue Regulation (RR) No. 1-2012:https://www.bir.gov.ph/index.php/revenue-issuances/revenue-regulations.html
• Allowable Itemized Deductions: If you choose to forgo the standard deduction, you can itemize your deductions. This involves keeping records and claiming deductions for specific allowable expenses. Some examples include:
  • Interest on loans used for business or investments (with limitations) Source: BIR website (tax treatment of interest income): [invalid URL removed]]
  • Donations to accredited charitable institutions (up to a certain percentage of your income) Source: BIR Revenue Regulation (RR) No. 6-2015:https://www.bir.gov.ph/index.php/revenue-issuances/revenue-regulations.html]
  • Medical and dental expenses exceeding a certain threshold Source: BIR Revenue Regulation (RR) No. 1-2012:https://www.bir.gov.ph/index.php/revenue-issuances/revenue-regulations.html]
  • Educational expenses (with limitations) Source: BIR Revenue Regulation (RR) No. 6-2017:https://www.bir.gov.ph/index.php/revenue-issuances/revenue-regulations.html]

Old vs Current Philippine Tax System On Personal Tax Exemptions

The Philippine tax system has undergone significant changes regarding personal exemptions in recent years. Here’s a breakdown comparing the old and current systems:

Old System (Pre-2018):

• Personal Exemption:A fixed amount deducted from your gross income before calculating your taxable income.
• Exemption Amount:The exemption amount varies depending on your civil status (single, married, head of family).
• Tax Brackets:The progressive tax brackets applied to your taxable income (income remaining after the personal exemption was deducted).

Current System (As of March 8, 2024):

• Personal Exemption:Eliminated. The concept of a fixed personal exemption is no longer part of the Philippine tax system.
• Increased Tax Brackets:To compensate for the removal of the personal exemption, the government introducedwider tax brackets. This means a larger portion of your income falls under the lower tax rates.
• Standard Deduction:Introduced as an alternative approach to reduce your taxable income. A standard deduction amount is subtracted directly from your gross income, regardless of your actual expenses.

Here’s a table summarizing the key differences:

Impact of the Changes:

• The removal of personal exemption and introduction of wider tax brackets generally benefit low- and middle-income earners who previously paid taxes due to the lower exemption thresholds.
• Higher-income earners might see a slight increase in their tax burden due to the wider tax brackets.
• The standard deduction offers an alternative for taxpayers who don’t have many documented expenses exceeding the standard deduction amount.

Limitations And Requirements For Deductions

In the Philippines, claiming deductions on your income tax return allows you to reduce your taxable income, potentially leading to lower tax liability. However, there are limitations and requirements you need to understand to ensure your deductions are valid.

Limitations on Deductions:

• Not All Expenses Qualify:Only expenses categorized asmandatory contributionsorallowable itemized deductionsby the Bureau of Internal Revenue (BIR) are deductible.
• Documentation Required:For itemized deductions, you must havereceipts, invoices, or other official documentsto prove your expenses.
• Spending Limits:Certain deductions havespending limitations. For example, medical and dental expenses exceeding a specific threshold are deductible, but the threshold amount itself is not deductible.
• Business or Investment Related:Deductions generally apply to expenses incurred to earn your income, whether from employment, business, or investments. Personal expenses are not deductible.

Here’s a breakdown of some specific limitations:

• Interest Expense:Interest on loans used for business or investments might be deductible, but there are limitations depending on the type of loan and its purpose. (Source: BIR website [invalid URL removed])
• Charitable Donations:Donations toaccredited charitable institutionsare deductible, but only up to a certain percentage of your taxable income. (Source: BIR Revenue Regulation (RR) No. 6-2015:https://www.bir.gov.ph/index.php/revenue-issuances/revenue-regulations.html)
• Educational Expenses:Only certain educational expenses, like tuition fees for qualified courses, are deductible, and there are limitations on the amount. (Source: BIR Revenue Regulation (RR) No. 6-2017:https://www.bir.gov.ph/index.php/revenue-issuances/revenue-regulations.html)

Requirements for Claiming Deductions:

• Proper Record-Keeping:It’s crucial to maintain proper records of your deductible expenses, such as receipts, invoices, or other official documentation.
• Standard Deduction vs. Itemized Deductions:Choose between the standard deduction (fixed amount) or itemizing your deductions (requires documentation).
• Compliance with BIR Regulations:Ensure your deductions comply with the latest BIR Revenue Regulations (RRs) for specific expense categories. These regulations provide detailed guidelines on what is and what is not deductible.

Computation Of Net Taxable Income And Tax Payable

Calculating your net taxable income in the Philippines is a crucial step in filing your tax return accurately. This process involves starting with your gross income (all income earned from various sources) and subtracting allowable deductions. These deductions, which can include mandatory contributions to social security programs and expenses related to your job or business, help reduce your overall taxable income, ultimately determining the amount of tax you owe.

Formula For Net Taxable Income

While there’s no single formula to encompass the entire Philippine tax system’s complexities, here’s a breakdown of the essential steps for calculating your net taxable income:

Net Taxable Income = Gross Income – Allowable Deductions

1. Gross Income:

• This refers to all income you earned from various sources during the tax year.
• Examples include income from:
  • Employment (salaries, wages, bonuses)
  • Business or profession (profits after deducting business expenses)
  • Investments (interest, dividends, capital gains)
  • Rentals
  • Other taxable income (prizes, royalties)

2. Allowable Deductions:

There are two main approaches to claiming deductions:

• Standard Deduction: A fixed amount subtracted directly from your gross income, regardless of your actual expenses. (Current standard deduction not to exceed 40% of your gross business or professional income) – Source: BIR website https://www.bir.gov.ph/index.php/tax-information/income-tax.html
• Itemized Deductions: Instead of the standard deduction, you can choose to itemize your deductions by listing and claiming the actual amount spent on specific allowable expenses. These require documented proof (receipts, invoices) and include:
  • Mandatory contributions to social security programs (SSS, Pag-IBIG, PhilHealth) – Source: BIR Revenue Regulation (RR) No. 1-2012:https://www.bir.gov.ph/index.php/revenue-issuances/revenue-regulations.html
  • Interest on loans used for business or investments (with limitations) – Source: BIR website (tax treatment of interest income) ([invalid URL removed])
  • Donations to accredited charitable institutions (up to a certain percentage of your income) – Source: BIR Revenue Regulation (RR) No. 6-2015:https://www.bir.gov.ph/index.php/revenue-issuances/revenue-regulations.html
  • Medical and dental expenses exceeding a certain threshold – Source: BIR Revenue Regulation (RR) No. 1-2012:https://www.bir.gov.ph/index.php/revenue-issuances/revenue-regulations.html
  • Educational expenses (with limitations) – Source: BIR Revenue Regulation (RR) No. 6-2017:https://www.bir.gov.ph/index.php/revenue-issuances/revenue-regulations.html

3. Net Taxable Income:

Once you’ve determined your gross income and chosen your deduction method (standard or itemized), subtract the allowable deductions from your gross income to arrive at your net taxable income. This amount is then used to determine your tax liability based on the Philippines’ progressive tax brackets.

Tax Brackets And Marginal Tax Rates

The Philippines utilizes a graduated income tax rate system with progressive tax brackets as of 2024. This means tax liability increases as your taxable income rises. Here’s a breakdown:

• Graduated System:Tax rates are not flat; they increase progressively with higher income levels.
• Tax Brackets:Defined ranges of taxable income. Each bracket has a correspondingmarginal tax rate.

Key Points to Remember:

• Taxable Income:Refers to your gross income minus allowable deductions (mandatory contributions and itemized deductions if applicable).
• Marginal Tax Rate:The tax rate applied to theadditional incomethat falls within a specific bracket. You only pay this rate on the portion of your income within that bracket, not your entire income.

Current Philippine Tax Brackets and Marginal Rates (As of March 8, 2024):

Example:

Suppose your taxable income is PhP500,000:

• The first PhP250,000 is taxed at 0%.
• The remaining PhP250,000 falls under the 15% marginal tax rate bracket. You only pay 15% tax on thisadditionalPhP250,000, not on your entire income.

Important Points:

• The BIR website offers the official tax table for more details:https://www.bir.gov.ph/
• Tax laws and regulations are subject to change. It’s recommended to consult the BIR for the latest information.

Computation Of Tax Payable

Assumption 1:

• Gross Annual Income: P300,000.00
• Mandatory contribution rates (assuming monthly salary):
  • SSS: 3.5%
  • Pag-IBIG: 2%
  • PhilHealth: 2.5%

Step 1: Calculate Total Mandatory Contributions

• SSS contribution: P300,000.00 x 3.5% = P10,500.00
• Pag-IBIG contribution: P300,000.00 x 2% = P6,000.00
• PhilHealth contribution: P300,000.00 x 2.5% = P7,500.00
• Total mandatory contributions: P10,500.00 (SSS) + P6,000.00 (Pag-IBIG) + P7,500.00 (PhilHealth) = P24,000.00

Step 2: Calculate Taxable Income

• Taxable income = Gross income – Mandatory contributions
• Taxable income = P300,000.00 – P24,000.00 = P276,000.00

Step 3: Determine Marginal Tax Rate

Since your taxable income falls within the range of “Over P250,000 but not over P400,000,” the applicable marginal tax rate is 15%.

Step 4: Calculate Income Tax Due

• Income tax = Taxable income x Marginal tax rate
• Income tax = P276,000.00 x 15% = P41,400.00

Summary:

• Total mandatory contributions: P24,000.00
• Taxable income: P276,000.00
• Marginal tax rate: 15%
• Income tax due: P41,400.00

Assumption 2:

Sample Assumptions:

• Gross Annual Income: PhP650,000.00
• Mandatory SSS, Pag-IBIG, and PhilHealth contribution rates (as of 2024, these are subject to change):
  • SSS: 13%
  • Pag-IBIG: 2%
  • PhilHealth: 3.5%

Step 1: Compute Mandatory Contribution Amounts

• SSS contribution: PhP650,000.00 x 13% = PhP84,500.00
• Pag-IBIG contribution: PhP650,000.00 x 2% = PhP13,000.00
• PhilHealth contribution: PhP650,000.00 x 3.5% = PhP22,750.00

Step 2: Calculate Total Mandatory Contributions

• Total mandatory contributions: PhP84,500.00 (SSS) + PhP13,000.00 (Pag-IBIG) + PhP22,750.00 (PhilHealth) = PhP120,250.00

Step 3: Determine Taxable Income

• Taxable income: PhP650,000.00 (gross income) – PhP120,250.00 (total mandatory contributions) = PhP529,750.00

Step 4: Identify Tax Bracket

Refer to the tax brackets provided earlier. Since PhP529,750.00 falls between PhP400,000.00 and PhP800,000.00, it falls under the 20% marginal tax rate bracket.

Step 5: Compute Tax Liability

• As your income falls within a single bracket, the marginal tax rate applies to your entire taxable income.
• Tax liability: PhP529,750.00 x 20% = PhP105,950.00

Summary:

• Annual Income: PhP650,000.00
• Mandatory contributions: PhP120,250.00
• Taxable income: PhP529,750.00
• Tax rate: 20%
• Tax liability: PhP105,950.00

Assumption 3:

Sample Assumptions:

• Gross Annual Income: PhP900,000.00
• Mandatory SSS, Pag-IBIG, and PhilHealth contributions (monthly average):
  • SSS: PhP12,000.00 (replace with your actual monthly SSS contribution)
  • Pag-IBIG: PhP2,000.00 (replace with your actual monthly Pag-IBIG contribution)
  • PhilHealth: PhP1,300.00 (replace with your actual monthly PhilHealth contribution)

Step 1: Calculate Total Mandatory Contributions

• Monthly contributions: PhP12,000.00 (SSS) + PhP2,000.00 (Pag-IBIG) + PhP1,300.00 (PhilHealth) = PhP15,300.00
• Annual contributions: PhP15,300.00/month x 12 months = PhP183,600.00

Step 2: Compute Taxable Income

• Taxable income = Gross income – Total mandatory contributions
• Taxable income = PhP900,000.00 – PhP183,600.00 = PhP716,400.00

Step 3: Identify Applicable Tax Bracket

Since your taxable income falls between PhP400,000.00 and PhP800,000.00, the applicable tax bracket is 20%.

Step 4: Calculate Income Tax

We’ll use the marginal tax rate concept here. The 20% rate applies only to the portion of your income that falls within the PhP400,000.00 to PhP800,000.00 bracket (PhP316,400.00 in this case).

• Tax = (Taxable income exceeding the lower bracket limit) x Marginal tax rate
• Tax = (PhP716,400.00 – PhP400,000.00) x 20%
• Tax = PhP316,400.00 x 20% = PhP63,280.00

Summary:

• Based on the Philippine graduated tax rate system and marginal rates for 2024, your income tax liability for a sample gross income of PhP900,000.00 and mandatory contributions of PhP183,600.00 would be approximately PhP63,280.00.

Net Taxable Income vs Lower and Higher Limits

You compare your net taxable income with the lower limits of the Philippine tax brackets to determine which bracket you fall under.

Here’s why:

• The Philippine tax system usesmarginal tax rates.
• Each bracket has alower limitand anupper limit.
• The marginal tax rate applies only to the portion of your income that fallswithinthat specific bracket.

Sample Computation:

Let’s say your net taxable income for 2024 is PhP650,000. Here’s how we determine the tax bracket and calculate the tax:

1. Identify the Bracket: We scan the lower limits of the brackets:
   • Not over PhP250,000
   • Over PhP250,000 but not over PhP400,000
   • Over PhP400,000 but not over PhP800,000
   • Over PhP800,000 but not over PhP2,000,000
   • Over PhP2,000,000 but not over PhP8,000,000
   • Over PhP8,000,000

Since your income (PhP650,000) is higher than PhP400,000 but lower than PhP800,000, you fall under the bracket with a lower limit of PhP400,000.

2. Apply the Marginal Tax Rate:

The marginal tax rate for this bracket is 20%. However, you don’t pay 20% on your entire income. You only pay 20% on the portion that falls within this bracket (PhP650,000 – PhP400,000 = PhP250,000).

Calculation:

Tax on the PhP250,000 portion = PhP250,000 x 20% = PhP50,000

Important Note:

The tax computation for income exceeding the lower limit of a bracket might involve additional calculations depending on the total income and subsequent brackets. It’s recommended to consult the BIR’s tax table or a tax professional for a more comprehensive calculation for your specific situation.

Tax Credits And Other Adjustments

In the Philippines, the concept of tax credits as a general deduction from your tax liability has been eliminated. However, there are some exceptions:

• Foreign Tax Credit:For corporations only, they can claim a credit for income taxes paid to a foreign country, provided the taxes are not claimed as deductions. (Source:https://taxsummaries.pwc.com/philippines)

Previously, the Philippine tax system offered personal exemption, which functioned similarly to a tax credit by reducing your taxable income. However, this was removed in recent reforms.

Absence of Tax Credits for Individuals:

While individual taxpayers don’t benefit from tax credits directly reducing their tax liability, the Philippine tax system employs wider tax brackets to compensate for the removal of personal exemptions. This means a larger portion of an individual’s income falls under lower tax rates.

The current Philippine tax system primarily relies on deductions to lower your taxable income and consequently, your tax liability. There are two main options for claiming deductions:

• Standard Deduction:A fixed amount subtracted directly from your gross income, regardless of your actual expenses.
• Itemized Deductions:Allow you to deduct the actual amount spent on specific allowable expenses, requiring documented proof through receipts or invoices. (Source: BIR websitehttps://www.bir.gov.ph/index.php/withholding-tax-calculator.html)

Introduction to Tax Filing Processes and Forms

Filing your taxes in the Philippines involves calculating your net taxable income and submitting the appropriate forms to the Bureau of Internal Revenue (BIR). This process starts with understanding your gross income from all sources. Then, you can choose between a standard deduction or itemize your allowable deductions (receipts required) to reduce your taxable income. Finally, depending on your income bracket, you’ll calculate your tax liability and submit the necessary BIR forms electronically or manually to fulfill your tax obligations.

The Bureau of Internal Revenue (BIR) in the Philippines requires individuals to use different tax forms depending on their income situation. Here’s a breakdown of some common BIR forms for individual taxpayers:

Income Tax Return (ITR) Forms:

• BIR Form 1700:This form is for individuals earningpurely compensation income, including non-business/non-profession related income. (Source: BIR websitehttps://www.bir.gov.ph/index.php/bir-forms/income-tax-return.html)
• BIR Form 1701:This form is used for individuals withmixed income, which includes those engaged in trade/business or the practice of a profession, and those with both compensation income and income from business/profession. (Source: BIR websitehttps://www.bir.gov.ph/index.php/bir-forms/income-tax-return.html)

Other Relevant Forms:

• BIR Form 2316:This form is for theAnnual Information Returnrequired for taxpayers with transactions subject to final withholding tax or those earning purely compensation income exceeding a certain threshold set by the BIR. (Source:https://www.bir.gov.ph/images/bir_files/old_files/pdf/16992316.pdf)
• BIR Form 1601 (series):These forms are used forwithholding tax on compensation. Different BIR Form 1601 variations exist depending on the type of compensation and the purpose of remittance (e.g., monthly withholding, quarterly remittance). (Source: BIR websitehttps://www.bir.gov.ph/index.php/tax-information/withholding-tax.html)

Choosing the Right Form:

The appropriate BIR form depends on your income situation:

• Purely Compensation Income:Use BIR Form 1700 if you only have income from salaries, wages, bonuses, and similar sources.
• Mixed-Income:Use BIR Form 1701 if you have income from both employment and business/profession.
• Final Withholding Tax or High Compensation Income:You might need to file BIR Form 2316 depending on the BIR’s current income thresholds.
• Employee Withholding Tax:Employers will typically handle BIR Form 1601 (series) for withholding taxes on your compensation.