Philippine Taxation: Deductions from Gross Income
Allowable Tax Deductions
These are the allowable tax deductions for individuals who earns income from compensation (through and employer-employee relationship) and business income (those engaged in business or practicing their profession):
- Personal Exemptions
- Additional Exemptions
These are the allowable tax deductions for individuals who earns income from compensation (through and employer-employee relationship):
- Premium Payment on Health and/or Hospitalization Insurance
These are the allowable tax deductions for individuals or corporations who earns income from business income (those engaged in business or practicing their profession): [Note that they are only allowed to pick one of these options]
- Optional Standard Deduction
- Itemized Deductions
Personal Tax Exemptions
The personal tax exemption is 50,000 Philippine Peso per individual taxpayer. That means it is a total of 50,000 Philippine Pesos for:
- Single individual or married individual judicially decreed as legally separated with no qualified dependents
- Head of the family
- Each married individual (If only one of the spouses is deriving gross income, only that spouse will have the personal exemption)
Additional Tax Exemptions
The additional tax exemptions are for individuals who have qualified dependents. For each qualified dependents of the taxpayer, they are granted an exemption of 25,000 Philippine Peso. However this is only limited to 4 qualified dependents (meaning, if there are 5 qualified dependents or more, the most that the taxpayer can be exempted of is until 100,000 Philippine Pesos only)
basis of a qualified dependent:
- Legitimate, illegitimate, legally adopted child of the taxpayer
- Not more than 21 years old
- More than 21 years old but physically or mentally incapacitated
- Dependent on the tax payer for chief support
- Living with the tax payer (even if they are living in dorms but the chief support is from the taxpayer, then they are still considered)
- Not gainfully employed (meaning, the taxpayer still support 51% of the child's living expenses)
Who can have the additional tax exemption?
- Husband (head of the family) unless he explicitly waived his right to his wife.
- The spouse who has custody of the child/children (in cases of legal separation)
- Individual considered as head of the family with qualified dependents.
Tax Deductions for Individuals Earning from Compensation
Premium payments on health and/or hospitalization insurance:
The taxpayer can have a maximum amount of P 2,400.
They can only claim it if:
- Family gross income yearly: not be more than P 250,000
- For married individuals: The spouse claiming the additional exemptions for the qualified dependents shall be entitled to this deduction
Tax Deductions for Individuals and Corporations Earning from Business
First Option: Optional Standard Deduction
If the individual or corporation chooses this option, they cannot deduct for the itemized deductions option anymore.
- For individuals: An amount not exceeding 40% of the net sales
- For Corporations: An amount not exceeding 40% of the gross income
Second Option: Itemized Deductions
Itemized Deductions which include the following: (exact amounts should be listed)
- Bad Debts
- Depletion of Oil and Gas Wells and Mines
- Charitable Contributions and Other Contributions
- Research and Development
- Pension Trusts
A note about the Charitable Contributions
The charitable contributions can be deductible in full or in limitation.
- If it is deductible in full then if there was a contribution P 20,000, P 20,000 is the amount deducted to the contributor.
- If it is deductible in limitation then the amount deducted is 10% of the net income before charitable contributions (if individual) and 5% of the net income before charitable contributions (if corporation).
How to know if deductible in full or limitation?
Donee/ Charitable Institution
Government (its agencies and instrumentalities)
If the purpose of the donation is for the priority projects (education, health, youth and sports development, human settlements, science and culture, and economic development)
If the purpose of the donation is for general purpose
Always deducted in full
If the corporation is non-stock and non-profit
Other domestic corporations