DEDUCTION FROM THE GROSS ESTATE

CITIZEN & RESIDENT DECEDENTS NON-RESIDENT ALIEN DECEDENTS

I. ORDINARY DEDUCTIONS I. ORDINARY DEDUCTIONS

A. Expenses, Losses, Indebtedness, taxes (LIT) A. Proportionate Deduction for Losses, Indebtedness,
Taxes, claims against insolvent person (LIT)
a) Losses
Gross Estate Philippines x LIT World
b) Indebtedness/claims against the estate
Gross Estate World
c) Taxes

d) Claims against insolvent person

B. Transfer for Public Use
B. Transfer for Public Use
C. Vanishing Deductions
C. Vanishing Deduction

II. SPECIAL DEDUCTIONS

II. SPECIAL DEDUCTIONS
 Standard Deduction of P500,000
 Standard deduction

 Family Home
III. SHARE OF THE SURVIVING SPOUSE (for married
 RA 4917
decedents)

III. SHARE OF THE SURVIVING SPOUSE (for married

decedents)

ORDINARY DEDUCTIONS

1. LOSSES

 Shall pertain to “casualty losses”

 Casualty losses includes storms, shipwreck or other casualties, or from robbery, theft or embezzlement.

 The amount deductible is the value of the property lost.

 Requisites for Deductibility:

i. Arising exclusively from:

a) Acts of God such as fire, storm, shipwreck and other similar casualty

b) Acts of man such as robbery, theft, embezzlement

ii. Not compensated by insurance or otherwise

iii. Not claimed as a deduction in an income tax return of the estate subject to income tax

iv. Incurred during the settlement of the estate:

a) Under the train law, 1 year from date of death or the extension (to file) which is not more than
30 days after the lapse of 1 year period.

2. INDEBTEDNESS or CLAIMS AGAINST THE ESTATE (Including Mortgage Payable)

 Debts and demands of a pecuniary nature which could have been enforced against the deceased in his lifetime
and could have been reduced to simple money judgments.

 The liability represents a personal obligation of the deceased:

i. existing at the time of his death

ii. Contracted in good faith (during his lifetime) for adequate and full consideration in money or money’s
worth.

 CLAIMS AGAINST THE ESTATE or indebtedness is respect of property may arise out of the following sources:
CONTRACT, TORT, OPERATION OF LAW.

 Claims arising after death are NOT allowed as deductions from gross estate.

 Requisites for Deductibility

 a) The liability represents personal obligation of the deceased existing at the time of hid death

b) The liability was contracted in good faith and for adequate and full consideration in money or
money’s worth

c) The liability must be a debt or claim which is valid in law and enforceable in court

d) The death must not have been condoned by the creditor or the action to collect from the decedent
must not have been prescribed.

 All unpaid obligations and liabilities of the decedent at the time of his death are allowed as deduction from
gross estate.

 In case of Simple Loan

a) Debt instrument must be duly notarized at the time the indebtedness was incurred.

 Except for loans granted by financial institutions where notarization is not part

b) Duly Notarized Certification from the creditor as to the unpaid balance of the debt, including interest
as of the time of death.

i. Creditor is a Corporation: sworn certification signed by the President or Vice President, or

other principal officer

ii. Creditor is a Partnership: sworn certification should be signed by any of the general
partners.

iii. Creditor is a bank or other financial institutions: certification shall be signed by the branch
manager

iv. Creditor is an Individual: sworn certification should be signed by him

 The one who should certify must not be a relative of the borrower within the 4 th civil degree,
either by consanguinity or affinity.

c) Proof of financial capacity of the creditor to lend the amount at the time the loan was granted.

i. Creditor is an Individual who is no longer required to file an income tax return: a duly
notarized Declaration by the creditor of his capacity to lend at the time when the loan was
granted

ii. Creditor is a non-resident: the executor/administrator or any of the legal heir must submit a
duly notarized declaration of his capacity to lend at the time when the loan was granted,
authenticated or certified by the tax authority.

d) Statement under oath executed by the administrator/executor of the estate reflecting the disposition
of the proceeds of the loan if said loan was contracted within 3 years prior to death of the decedent.

 If the Unpaid Obligation arose from Purchase of Goods or Services:

a) Pertinent documents evidencing the purchase of goods or service, as duly acknowledge, executed and
signed by decedent-debtor and creditor, and statement of account given by the creditor as duly
received by the decedent-debtor.

b) Duly notarized certification from the creditor as to unpaid balance of the debt, including interest as of
the time of death.

c) Certified true copy of the latest audited balance sheet of the creditor with a detailed schedule of its
receivable showing the unpaid balance of the decedent-debtor.

d) Where the settlement is made through the Court in a testate or intestate proceeding, pertinent
documents filed with the Court evidencing the claims against the estate, and the Court Order
approving the said claims.

 Unpaid mortgages or Indebtedness on Property

 Allowed when a decedent leaves property encumbered by a mortgage or indebtedness contracted in

good faith and for adequate and full consideration.

 To be allowed as a deduction, his gross estate must include the FMV of the property encumbered.

 The amount allowed as a deduction would be the outstanding debt/mortgage.

 In case unpaid mortgage is being claimed by the estate:

 Verification must be made as to who was the beneficiary of the loan proceeds.
  If the loan is found to be merely an accommodation loan, the value of the unpaid loan must
be included as receivable of the estate.

 If the is a legal impediment to recognize the same as receivable of the estate, said unpaid
obligation/mortgage payable shall not be allowed as a deduction from the gross estate.

 The mortgaged property, to the extent of the decedents interest therein, should always form part of
the gross estate.

 Even prior to Train Law, unpaid funeral and judicial expenses are NOT classified as claim against the estate.

 They are deductible separately as funeral and judicial expenses

 However, upon effectivity of the TRAIN Law: funeral, judicial and medical expenses are NO longer
deductible form the gross estate.

 Receivables from gambling (wagering gains) before death are inclusions from the decedents gross estate.

 However, debts from wagering or gambling losses are NOT allowed as deductions from the gross
estate.

3. TAXES

 These are taxes that accrued prior to the death of the decedent.

 The following are not allowed as deductions;

1. Income tax on income received after death

2. Property taxes accrued after death

3. Estate tax

4. OTHER DEDUCTIONS SUCH AS CLAIMS AGAINST AN INSOLVENT PERSON

 These are claims by the decedent during his lifetime that are not collectible.

 Requisites for deductibility.

For purposes of estate taxation, a judicial declaration of insolvency is not required but:

a. The incapacity of the debtor to pay his obligation should be proven.

b. The full amount owed by the insolvent must first be included in the decedent’s gross estate and
the amount uncollectible shall be allowed as deduction.

c. If the insolvent could only pay partial amount, the full amount owed shall be included in the
gross estate, and the amount uncollectible shall be allowed as a deduction.

TRANSFER FOR PUBLIC USE

 Dispositions in a last will and testament or transfers to take effect after the death in favor of the government of the
Philippines or any political subdivision for exclusively public purposes.

 Before a transfer for public use is allowed as deduction from gross estate, same amount shall be included fists in the
computation of gross estate.

VANISHING DEDUCTIONS (PROPERTY PREVIOUSLY TAXED)

 It is an amount allowed to reduce the taxable estate of a decedent where the property received by him from a prior
decedent or donor by (1) gift or by (2) bequest, device or inheritance, has been the object of previous transfer
taxation.

 Allowed as a deduction from gross estate to minimize the effect of or as a remedy against double taxation.

 Requisites for Deductibility

a) Death - the present decedent died within 5 years from the date of death of the prior decedent or date of
gift.

b) Identity of property - the property with respect to which deduction is sought can be identified as the one
received from the prior decedent, or from the donor, or as the property acquired in exchange for the
original property so received.

c) Location - the property on which vanishing deducting is being claimed must be located in the Philippines.
 d) Inclusion of the Property - the property must have formed part of the gross estate situated in the
Philippines of the prior decedent or have been included in the total amount of the gifts of the donor made
within 5 years prior to the present decedent’s death.

e) Previous Taxation of the Property - the estate tax on the prior succession, or the donor’s tax on the gift
must have been finally determined and paid by the prior decedent or by the donor as the case maybe

f) No previous vanishing deduction on the property

 VANISHING DEDUCTION RATES

Within 1 year 100%

Beyond 1 year to 2 years 80%

Beyond 2 years to 3 years 60%

Beyond 3 years to 4 years 40%

Beyond 4 years to 5 years 20%

 COMPUTATION:

Step 1: VALUE TO TAKE P xx

 The lower amount between the value of the property in the gross

estate of the prior decedent or value of the gift and value of the same

property in the gross estate of the present decedent.

Step 2: LESS: MORTGAGE PAID (1st Deduction) xx

 Paid by the present decedent from the mortgage assumed when the

Property was inherited or received as a donation _______

INITIAL BASIS P xx

Step 3: LESS: PROPORTIONAL DEDUCTION (2nd deduction)

(Initial Basis / Gross Estate) x LIT + Transfer for Public use xx

FINAL BASIS P xx

Step 4: VANISHING DEDUCTION % x%

VANISHING DEDUCTION P xx

 Example:

Pedro received a car as a gift from Juan on January 1, 2016. The value of the Car at the time it was donated to
Pedro was P1M. However, Pedro assumed a P200,000 mortgage on the car. The corresponding donor’s tax was paid
by Juan. Pedro paid a total of P100,000 on the mortgage in 2016 and 2017.

On November 1, 2018, Pedro died. His gross estate at the time of his death amounted to P5,000,000 including
the car received from Juan valued at P700,000.

Funeral Expenses P 250,000

Losses 100,000

Unpaid mortgage (including the mortgage of the car) 200,000

Unpaid taxes before death 100,000

Unpaid taxes after death 25,000

Unpaid medical expenses 300,000

Donation mortis causa to Quezon city for public purpose 500,000

VALUE TO TAKE (lower amount between P1M & P700T) P 700,000

Less: 1st deduction 100,000

INITIAL BASIS P 600,000

Less: 2nd deduction

 600,000 x (100+200+100+500) 108,000

5,000,000

FINAL BASIS P 492,000

Multiply by: Vanishing Deduction Rate 60%

VANISHING DEDUCTION P 295,200

SPECIAL DEDUCTIONS

A. STANDARD DEDUCTION

 The law allows a standard deduction without qualification, condition nor requisite whatsoever.

 This amount shall be allowed as an additional deduction without the need for substantiation.

 The full amount shall be allowed as deduction for the benefit of the decedent.

 Allowable amount under the TRAIN LAW

 If the decedent is a citizen or resident - P5,000,000

 If the decedent is a nonresident alien - P500,000

 This is the only special deduction allowed to a nonresident alien decedent.

B. FAMILY HOME

 The amount allowable as a deduction would be whichever is lower P10,000,000 or the FMV at the time of the
decedents death, of the family home & the land on which it stands.

 P1,000,000 prior to TRAIN Law.

 It is deemed constituted on the house & lot from the time it is actually occupied as a family residence and is
considered as such for as long as any its beneficiaries actually resides therein.

 Must be part of the properties of the absolute community or of the conjugal partnership or of the exclusive
properties of either spouse.

 Beneficiaries

a) Husband and wide, or head of a family; and

b) Their parents, ascendants, descendants including legally adopted children, brothers and sisters,
whether the relationship be legitimate or illegitimate, who are living in the family home and who
depend upon the head of the family for legal support

 Requisites for Deductibility

1. The decedent was married or if single, was a hear of the family

2. Along with the decedent, any of the beneficiaries must be dwelling in the family home.

3. The family home should have been included in the computation of the decedent’s gross estate.

4. The family home must be the actual residential home of the decedent and his family at the time of his
death, as certified by the Barangay Captain of the locality where the family home is situated.

5. The value of the family home must be included as part of the gross estate of the decedent; and

6. Allowable deduction must be in an amount equivalent to the current FMV of the family home as
declared or included in the gross estate, or the extent of the decedent’s interest, whichever is lower,
but not exceeding P10,000,000.

 For marries decedent, the FMV of the family home should be divided by 2 if the same is conjugal or community
property.

C. AMOUNTS RECEIVED BY HEIRS UNDER RA 4917

 An Act Providing that Retirement Benefits of Employees of Private Firms shall not be subject to attachment,
levy, execution or any tax whatsoever

 Provided such amount is included as part of the gross estate of the decedent.

NET SHARE OF THE SURVIVING SPOUSE

 The net share is equivalent to 1/2 or 50% of the conjugal property after deducing the obligations chargeable
(ordinary deductions only) to such property.

 The share of the surviving spouse must be removed to ensure that only the decedent’s interest in the estate is taxed.