What are the deductions and exemptions you can claim against your taxable income in computing income tax and preparing your annual tax return? The computation for income tax expense and payable for individuals and corporations (including taxable partnerships) differs. Individual taxpayers can claim personal and additional exemptions that reduce their total taxable income while corporations, which are not natural persons, obviously cannot. Furthermore, income tax rate on individuals are graduated (progressive), while the corporation income taxes (regular corporate income tax and minimum corporate income tax) are computed at fixed rates. If you are on your way now to computing your income to be filed and remitted with the BIR, the following deductions and exemptions may reduce your taxable income, and thereby also reducing your income tax.
What are allowable deductions from gross income?
1. Optional Standard Deductions. Both individual taxpayers and corporations have the option to claim optional standard deductions (OSD in lieu of itemized deductions. The following are OSD for individuals and corporations:
a. OSD for individual
For individual taxpayers, a maximum of 40% of their gross sales or gross receipts shall be allowed as deduction instead of the itemized deduction. This type of deduction shall not be allowed for non-resident aliens engaged in trade or business.
b. OSD for corporations
RA 9504, which was approved effective July 2008, gives corporate taxpayers an option to claim optional standard deduction (OSD) instead of itemized deductions. OSD is equivalent to 40% of gross income. Once the option to use OSD is made, it shall be irrevocable for the taxable year for which the option was made. A corporation who availed and claimed this deduction is still required to submit its financial statements when it files its annual tax return and to keep such records pertaining to its gross income.
2. Itemized deductions. These deductions from gross income include all ordinary and necessary trade and business expenses paid or incurred during the taxable year in carrying on or which are directly attributable to the development, management, operation and/or conduct of the trade and business. Itemized deductions include the following:
c) Interest *
e) Rental expenses
f) Entertainment expenses *
g) Taxes *
i) Bad Debts *
k) Depletion of Oil and Gas Wells and Mines
l) Charitable Contributions and Other Contributions *
m) Research and Development
n) Pension Trusts
o) Premium payments on health/ or hospitalization insurance *
p) and other expenses that may be allowed as itemized deductions by the NIRC
Important Note: Certain expenses, such as interest, bad debts, taxes, entertainment and other expenses have been set with limitations and exemptions in claiming as deductions against the taxable income. To learn more on the limitations, tax arbitrage and exemptions on those expenses, please read our article “ allowable deductions in the Philippines”. Premium payment on health and/or hospitalization insurance of an individual taxpayer, including his family, in the amount of P= 2,400 per year, per family, may be deducted from his gross income: Provided, that said taxpayer, including his family, has a yearly gross income of not more than P= 250,000. In case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction.
Personal and Additional Exemptions
As discussed earlier, individual taxpayers may claim personal and addition exemptions as follows:
1. Personal exemption
For single individual or married individual judicially decreed as legally separated with no qualified dependents………………………………………P 50,000.00
For head of family……………………………P 50,000.00
For each married individual *…………P 50,000.00
Note: In case of married individuals where only one of the spouses is deriving gross income, only such spouse will be allowed to claim the personal exemption.
2. Additional exemption.
For each qualified dependent, a P25,000 additional exemption can be claimed but only up to 4 qualified dependents. The additional exemption can be claimed by the following:
- The husband who is deemed the head of the family unless he explicitly waives his right in favor of his wife
- The spouse who has custody of the child or children in case of legally separated spouses. Provided, that the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions allowed by the Tax Code.
- The individuals considered as Head of the Family supporting a qualified dependent
Note: Dependent Child” means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.
Disclaimer: This article was published for informational use only. New laws, BIR issuances, regulations and rulings may render this post obsolete or incorrect in part or in full. For more information, please visit the BIR website or office for more information.