Income Taxation Activity 6 PDF

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ALDRIN J. ROMERO What is the tax treatment for (in table form): A. Resident citizen who derive income from within and without? How much is the tax rate? B. Non-resident citizen who derive income from within and without? How much is the tax rate? C. Resident alien who derive income from within and wi...

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ALDRIN J. ROMERO

1. What is the tax treatment for (in table form): A. Resident citizen who derive income from within and without? How much is the tax rate? B. Non-resident citizen who derive income from within and without? How much is the tax rate? C. Resident alien who derive income from within and without? How much is the tax rate?

Resident citizen Non-resident citizen Resident alien

Within the Phil. Y Y

Without the Phil. Y N

Y

N

Tax rate 5-32% 25% on their Gross income 20%

2. Differentiate a non-resident alien who engaged in trade or business and non-resident alien who is not engaged in trade or business, as to the following: a. Period  A non-resident alien who engaged in trade or business is one who stays in the Philippines for an aggregate period of more than 180 days during any calendar year. While a non-resident alien who is not engaged in trade or business is one who is not a citizen of the Philippines and who is not a resident of the Philippines but deriving income as employee in the Philippines or stays in the Philippines less than 180 days. b. Concept  A Non-resident alien engaged in trade or business in the Philippines shall be entitled to personal exemption in an amount equal to the exemptions allowed by the tax law of the country of which he/she is a subject or citizen but not to exceed the amount fixed in the NRC as exemption for citizens or residents of the Philippines. While a Non-resident citizen who’s not engaged in trade or business are no personal and additional exemption allowed.  Non-resident alien engaged in trade or business in the Philippines, who is receiving income, whether it constitutes the sole source of their income or in combination with salaries, wages, and other fixed or determinable income, is required to file an income tax return on or before 15 April of each year covering income for the

preceding taxable year. While a Non-resident alien not engaged in trade or business don’t need to file an income tax return on their compensation income. c. Tax rate  Net taxable income for non-resident alien engaged in trade or business are taxed at graduated rates ranging from 0% to 35%. While the non-resident alien who’s not engaged in trade or business are taxed at a flat rate of 25% of gross income unless a lower rate is applicable under a double tax treaty or special law.

3. What are deductions to gross income? Give example to each item.  The deductions of gross income are: 1.) Resident citizen a. Compensation income – only premium payments on health and/or hospitalization not exceeding P2,400 a year are deductible from gross compensation income provided that the taxpayer availing of said deduction has a family income of not more than P250,000 for the taxable year. b. Business and/or Professional income – this includes: ordinary and necessary trade, business or professional expenses paid; interest paid; taxes paid; losses; net operating loss carry-over; bad debts; depreciation; depletion of oil and gas wells and mines; charitable and other contributions; research and development; pension trusts; an optional standard deduction equal to 40% of the gross sales; premium payments on health and/or hospitalization insurance; and free legal service. 2.) Non-resident citizen  Same deductions as allowed to resident citizen 3.) Resident alien  Same deductions as allowed to resident citizen 4.) Non-resident alien a. Engaged in trade of business in the Philippines – are entitled to the same deductions allowed to resident citizens and subject to the same limitations, except on the ff. items of deductions: Taxes, Losses, Depreciation, and Depletion of oil and gas wells and mines. b. Not engaged in trade or business in the Philippines – no deductions are allowed. c. Employed by regional or area headquarters and regional operating headquarters of multinational corporations, offshore banking units, or service contractors or subcontractors engaged in petroleum operations in the Philippines – no deductions are allowed.

4. What are considered passive income? Give example for each item.  Passive incomes include earnings from a rental property, limited partnership, or other business in which a person is not actively involved —a silent investor, for example. TYPES OF PASSIVE INCOME: Self-charged interest When money is loaned to a partnership or an S corporation acting as a pass-through entity (essentially, a business that is designed to reduce the effects of double taxation) by that entity’s owner, the interest income on that loan to the portfolio income can qualify as passive income. “Certain self-charged interest income or deductions may be treated as passive activity gross income or passive activity deductions if the loan proceeds are used in a passive activity," the IRS states.1 Rental properties Rental properties are defined as passive income with a couple of exceptions. If you’re a real estate professional, any rental income you’re making counts as active income. If you’re “self-renting,” meaning that you own a space and are renting it out to a corporation or partnership where you conduct business, that does not constitute passive income unless that lease had been signed before 1988, in which case you’ve been grandfathered into having that income defined as passive. The IRS notes, “It doesn’t matter whether or not the use is under a lease, a service contract, or some other arrangement.”

No material participation’ in a business If you put $500,000 into a candy store with the agreement that the owners would pay you a percentage of earnings, that would be considered passive income as long as you do not participate in the operation of the business in any meaningful way other than making the investment. If you helped manage the company with the owners, your income could be seen as active, because you provided “material participation." The IRS has standards for material participation that include the following:5   

If you’ve dedicated more than 500 hours to a business or activity from which you’re profiting, that is material participation. If your participation in an activity has been “substantially all” of the participation for that tax year, that is material participation. If you’ve participated up to 100 hours and that is at least as much as any other person involved in the activity, that also is defined as material participation....