What are Deductions and Exemptions to Income Tax (Philippines)

Mar 28, 2011 by at Law & Government, Taxation

What are Deductions and Exemptions to Income Tax (Philippines)

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:

a)      Expenses
b)      Salaries
c)      Interest *
d)      Travel
e)      Rental expenses
f)       Entertainment expenses *
g)      Taxes *
h)      Losses
i)        Bad Debts *
j)        Depreciation
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.

Victorino Abrugar is a retired CPA practitioner, a blogger, speaker, and an entrepreneur. He's the CEO of Optixor, Inc., a digital marketing company based in the Philippines. Follow him on Twitter at @viclogic.

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21 Comments

  1. Roy

    first time to hear about optional standard deduction. i really should brush up on my accounting

  2. John Lagos

    Hello Victorino,

    Is it possible for an employee to avail of tax deductions such as Charitable Contributions and Other Contributions? If so, how? Thanks!

    Regards,
    John

  3. Mel

    Sir for example i have 6 children

    maximum of 4 qualified dependents right?

    what if my 1st dependent is not qualified anymore, but my 5th child is

    can i register/avail my 5th child as my 4th dependent since my 1stdep is not qualified anymore?

    Thanks sir!

  4. Vic

    Yes you can since you have a maximum of 4 qualified dependent children to claim.

  5. rey

    Hello Sir,
    We are 13 in the Family.I am 10th child of my father & mother, 9 of my brothers & sisters are married,my youngest brother and I are not.My father is paralized and my Mother is not cosidered as employed they are the same 60 years old above.,Can i cailm them as Additional Exemption?

  6. Robelyn Gula

    What is the status of a child if he turns 22 in July 2012? Is he still part of an additional deduction for that year or not anymore? What if he turns 22 on May 2012, is he still part of the additional exemption?

  7. Joy

    Sir, I am not married but I have a daughter whose surname is thru his father. BIR is asking me for a waiver. The father of my kid has abandoned us na and I don’t have any way of contacting him. I don’t know if he is still in the Philippines or where ever because he has changed his number and address. Ano kaya ang gagawin ko para ma-declare ko as dependent ang anak ko in lieu of the waiver?I have a solo parent ID pero waiver pa din ang hinahanap sa akin ng BIR 043A branch. Please give me advise. Thank you in advance.

  8. kristine

    sir, i had submitted my bir form 2305 and i did not fill up the space providing my husband’s tin number and his employer, he was employed locally in one of the private schools here in our place but his employer did not applied him a tin number..a bir officer told me to submit my husband’s waiver.Unfortunately when i look for a sample of waiver it has stated there that both of us are taxpayers, how can i claim for additional exemptions for my children if he doesn’t have any tin number?

    • kristine

      how can i claim for additional exemptions for my children if he doesn’t have any tin number? Unfortunately when i look for a sample of waiver it has stated there that both of us SHOULD BE taxpayers,

  9. Carlo

    Hi Sir I am single but I am the head of my family. I am supporting my sister for her college. And my father and aunt for their daily living. Can I have tax deductions?

  10. William

    Pag breadwinner po ba puwede mag claim ng additional exemption. Kung idedeclare na dependents ang parents at kapatid na pinag-aaral? salamat po sa reply :)

    • No. You can only declare a dependent child as your additional exemption, subject to the provision of the tax code. The breadwinner status gives a taxpayer a “head of the family” status. However, today, single, married and head of the family taxpayers have all the same amount of personal exemption, that is, P50,000. For more questions, please visit our forums. http://www.businessforum.ph

  11. Sheree

    My qualified dependent would turn 22 on December 2013. Can I still claim her as additional dependent since she is still 21 years old from Jan. to Nov?

    Thanks

  12. daniel

    Hello! Is allowance taxable income? How much percent?

  13. manny

    hi, just want to know where to deduct PERSONAL EXEMPTION of 50k. Should I deduct it from Gross Income or from Net Income before tax or from Net Income after tax? I am on a proprietorship. thanks.

  14. randy

    When making the article, please include the regulation no. issued for our reference

  15. Jonathan

    When is OSD deductible? My assignment..pls help me.

  16. Rowena

    If my dependent turn 21 on Oct, in the year end computation, paano sya icompute? Is it for January na or for last qtr? how? Thanks for sa sagot..

  17. Jonathan

    Just want to ask if I can include my one child as my dependent upon filing tax exempt even she is not bringing my family name? If yes, what are the documents to present, and how much is my tax exemption. Thank you

  18. Amelita L. Juanico

    My daughter turned 22 years old last Sept 2014. Is she still part of my additional exemption for this 2014?

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