03 chapter 4 deductions from gross estate part 01

Taxation 2 │DEDUCTIONS FROM GROSS ESTATE

FLABERT VILLASENCIO, CPANotre Dame of Dadiangas University

Deductions

oAre items allowed by law to be deducted to the gross estate in order to arrive at the net taxable estate.

oOnly those allowed by law shall be claimed as deduction.

oThese items must be able to justify and should be proved that the expenses really exist.

ORDINARY

SPECIAL

ExpensesLosses

IndebtednessTaxes

Transfer for public useAmount received by heir under RA 4917Vanishing deductionsShare of surviving spouse

Funeral

Judicial Claims against the estate

Claims against insolvent person

Family homeMedical ExpensesStandard deduction

Funeral Expenses

oActual funeral expenses means cost incurred in connection with the internment or burial of the deceased with official receiptsoThe amount allowed as deductions shall equal to the ACTUAL EXPENSES incurred OR the 5% of the GROSS ESTATE whichever is LOWER but in NO CASE shall exceed P200,000.

Example. Compute the amount deductible funeral expenses in each of the following cases:

Case Gross estate Actual Funeral Expenses

1 P500,000 P70,000

2 2,000,000 90,000

3 4,500,000 185,000

4 5,000,000 220,000

Funeral Expenses

Answers:

Funeral Expenses

o Funeral expenses shall consist of the following

o Internment and/or cremation fees

oMourning apparel of the surviving spouse and unmarried minor children of the deceased bought and used on the occasion of the burial

o Expenses for the decedent’s wake, including food and drinks before the burial

o Fees and charges for the rites and ceremonies incident to the burial

o Expenses for the death notices published, telegrams and cable grams sent to the relatives of the deceased; and

o Cost of the burial lot, tombstone or monument but not their upkeep. In case it is a family lot, the lot of the deceased shall only be deductible.

Funeral Expenses

Example. Chit Sharon’s gross estate is P3,000,000. Her executor is claiming the following as funeral expenses related to the death of Chit:

Hospitalization incurred during the last 3 months prior to Chit’s death P50,000Burial lot, 20% are paid from friends contribution 50,000Expenses for wake before burial 20,000Thank you cards to the sympathizers 2,000Telegrams and cables sent to the relatives 1,000Mourning apparel of the surviving spouse and children 3,000Mourning apparel of the relatives 1,000Entertainment expenses during the rites and ceremonies during burial2,500

How much is the allowable funeral expense?

Funeral Expenses

Burial lot (P50,000 x 80%)P40,00

0Expenses for wake before burial 20,000Telegrams and cable to relatives 1,000Mourning apparel of the surviving spouse and children

3,000

Entertainment expenses during the rites and burial ceremonies

2,500

Allowable funeral expensesP66,50

0

Answer:

Funeral Expenses

Judicial expenses

oAre allowed deductions incurred for the administration, inventory taking of assets, and settlement of the estate.oTo be deductible, judicial expenses should be incurred during the settlement of estate but not beyond the last day prescribed by law, or the extension thereof, for the filing of the estate tax return.

▪ include–Fees of executor or administrator–Attorneys fee–Court fees–Accountant fees–Appraisers fees–Clerk hire–Costs of preserving and distributing the estate–Costs of storing or maintaining property of the

estate and–Brokerage fees for selling property of the

estate.

Judicial expenses

oExpenses not essential to the proper settlement of the estate but incurred for the individual benefit of the heirs, legatees, or devisees are not allowed as deductions. Thus, the following are not allowed as deductions:

o Attorney’s fees incident to litigation incurred by the heirs in asserting their respective rights or claims as to who are entitled to the estate left by the deceased;

o Premiums paid by a judicial administrator on his bond are not deductible because the ability of the appointee to give bond in in the nature of a qualification

o Compensation of trustees such expenses being for the account and benefit not of the estate but of the beneficiaries.

Judicial expenses

Example. Malakas and Maganda had a disagreement in the sharing of inheritance of the estate of their parents. The disagreement prompted both parties to bring the matter to the court. Both of them incurred and paid attorney’s fees incident to litigation.

a.Are the expenses borne by the opposing parties deductible from gross estate under judicial expenses?

Answer: No

Judicial expenses

Casualty losses

oAll losses incurred during the settlement of the estate arising from theft, robbery embezzlement, fire, shipwrecks, storms and other calamities.

oCasualty losses can be claimed as long as: the amount of loss is not compensated for by any insurance or extra judicial settlement; and

oThey have not been claimed as deduction from gross income for purposes of income tax computation.

Claims against the estate

oPertains to debts which are properly chargeable and enforceable against the estate.

oTo be deductible, the following requisites must be complied

oThe liability represents a personal obligation of the deceased existing at the time of his death except unpaid obligations incurred incident to his death such as unpaid funeral expenses and unpaid medical expenses.

oThat the liability was contracted in good faith and for an adequate and full consideration in money or money’s worth

oThe claim must be a debt or claim which is valid in law and enforceable in court

oThe indebtedness must not have been condoned by the creditor or the action to collect from the decedent must not have prescribed.

Example. Doris borrowed P50,000 from her friend, Sabel. Before indebtedness was paid, Doris died.

a.Is the unpaid obligation deductible from the gross estate of Doris?

b.How about if its deductibility would leave nothing to be distributed among the heirs?

c.How about if Sabel decides to condone the debt?

ANSWERS: YES; YES; NO

Claims against the estate

▪A requisite for its deductibility is that the value of the decedent’s interest therein is included in the value of the gross estate and that the debtors are incapable of paying their indebtedness.

Claims against Insolvent Person

Example. Bolalin borrowed P150,000 from Arturo. After a month, the debtor paid P50,000. before the remaining balance of P100,000 was paid, Arturo died. Prior to his death, the court declared Bolalin insolvent. The total assets and total liabilities of the debtor amount to P200,000 and P500,000, respectively. How much bad debt is deductible from the estate of Arturo?

Remaining debt of Bolalin P100,000

Less: Recoverable amount (2/5 x P100k) 40,000

Amount deductible P 60,000

Claims against Insolvent Person

Unpaid Mortgages

oThese are unpaid indebtedness or loans secured by debtor’s property, contracted in good faith and for an adequate and full consideration in money or money’s worth.oTo be deductible, the property mortgaged must be part of the gross estate at FMV.

Unpaid taxes

▪ Refer to taxes incurred prior to the date of the decedent’s death and remained unpaid as of the date of death.

DEATH

BeforeDeductible

AfterNon-deductible

SEATWORK: (1/2

CW)4-54-10 TO 4-19

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