Week 15-16 Income Taxes of Estates and Trusts.pptx

Week 15-16 Income Taxes of Estates and Trusts.pptx

1. Income Taxes of Estates and Trusts LESSON 13

2. Estate rights and obligations including those properties, or obligations that have accrued thereto since the opening of the succession the estate is to be transferred from the decent to his successors.

3. Taxable Income and Tax Rates the taxable income of the estate/trust shall be determined in the same manner and basis as in the case of individual taxpayers.

4. The items composing the taxable income and tax of the income from estates/trusts are as follows: 1.Gross Income is the same items as the items of gross income of individual taxpayers. 2.Deduction is the same as the items of deduction allowed to an individual taxpayer. 3.Special Deduction is also allowed to deduct the amount of income of the estates during the taxable year that is paid or credited withholding tax of 15%. beneficiaries. 4.Exemption allowed to Estates and Trusts the absolute exemption allowed to estates and trusts is 20,000php . For the income of estates, however, the following provision of the law shall be considered: “if the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependent(s) as if he died at the close of the year.” 5.Taxable Income shall be computed in the same manner and on the same basis as in the case of individual taxpayer. 6.Tax Rate is the tax rate prescribed for individual taxpayers.

5. Trust It is an obligation imposed or a right to administer over a property given to a person for the benefit of another.

6. Income derived from Trusts 1.Income accumulated in trust for the benefit of unborn or unascertained persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust. 2.Income that is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant that is to be held or distributed as the court may direct. 3.Income that, in the beneficiaries of the fiduciary, may be either distributed to the beneficiaries or accumulated.

7. Computation of Trust’s Income Tax The computation of the net taxable income of trust shall be in the same manner as that of the net taxable income of an estate.

8. Two or More Trusts In the case of two or more trusts created by the same person for the same beneficiary, the taxable income of all trusts shall be consolidated and the tax shall be computed based on the consolidated income.

9. Trust as a Device to Lower Income Tax Creating a trust could lower the income tax by splitting the income between two taxpayers, and consequently lowering taxable income to lower tax bracket.

10. Revocable Trusts Generally, revocable trusts exist when the trustor (grantor) reserves the power to change at any time any part of the terms of the trust.

11. Illustrations:

12.  Example 1 : Mr. Mano Baliling, married, died on August 31, 201A, leaving his wife and his four qualified dependent children. He left his income generating exclusive real property amounting to 10,000,000 under an administrator. The results of operation show the following: In 201A and 201B, the administrator credited 340,000php net of 15% withholding tax, each year to Mrs. Maria Baliling. The amounts represent the share of the beneficiary. The net taxable income and income tax due to Mr. Baliling and his estate would be   Year 201A Year 201B   Jan to Aug Sept to Dec Jan to Dec Gross income 1,500,000 1,000,000 2,500,000 Itemized deductions 800,000 500,000 1,500,000 Net income 700,000 500,000 1,000,000           Jan to Aug Sept to Dec Jan to Dec   Mr. Mano Mano’s Estate Mano’s Estate Net income 700,000 500,000 1,000,000 Amount for beneficiary (340,000/85%)   (400,000) (400,000) Net income before exemption 700,000 100,000 600,000 Less: Applicable exemptions 150,000 20,000 20,000 Net taxable income 550,000 80,000 580,000 Tax on 70,000   8,500   Tax on 500,000 125,000   125,000 Tax on excess:       (10,000 x 20%)   2,000   (50,000 x 32%) 16,000     (80,000 x 32%)     25,600 Income tax due 141,000 10,500 150,600

13. Assuming that Mrs. Maria Baliling, the beneficiary, has no other income during the taxable years, her income tax would be   201A 201B Gross income received from income of estate (340,000/85%) 400,000 400,000 Less: OSD (400,000 x 40%) 160,000 160,000 Income before exemption 240,000 240,000 Less: personal exemptions     201A: 50,000 50,000   201B: 50,000 + (25,000 x 4)   150,000 Taxable income 190,000 90,000 Tax on 140,000/70,000 22,500 8,500 Tax on excess:     201A: (50,000 x 25%) 12,500   201B: (20,000 x 20%)   4,000 Income tax due 35,000 12,500 Less: creditable withholding tax (400,000 x 15%) 60,000 60,000 Income tax refund 25,000 47,500

14. Example 2: One Trust Mr. Sy Guardo created a Trust assigning Atty. Ver Dugo as trustee. In 201A, the trust’s income, expense and income distribution are as follows . The related income tax is computed below: Rental income 120,000 Related allowable expenses 10,000 Income distributed to Miss Fanie Guardo the beneficiary 40,000 Gross income   120,000 Less: related expenses 10,000   Amount distributed to beneficiary 40,000 50,000 Income before exemption   70,000 Less: absolute exemption   20,000 Net taxable income   50,000 Income tax on 30,000   2,500 Excess (20,000 x 15%)   3,000 Total income tax due   5,500

15. Example 3: Two or More Trusts Mr. Mar Don created two irrevocable trusts: a trust (Trust A) on his property located in Baguio for his only son, assigning Atty. Pis as trustee, and another trust (Trust B) on his property located in La Union, also for his son, but this time naming Atty. Lasap as the trustee. For the year 201A, the two trustees reported the following income and expenses:   Gross income Expenses Distributed to beneficiary Quarterly taxes paid Trust A 140,000 30,000 10,000 10,000 Trust B 260,000 60,000 30,000 20,000 Total 400,000 90,000 40,000 30,000

16. To compute for income tax still due of the two trusts would be   Trust A Trust B Total Taxable income before exemption 100,000 170,000 270,000 Less: absolute exemption     20,000 Consolidated taxable income     250,000 Income tax due     50,000 Allocation of 50,000       Trust A (50,000 x 10/27) 18,519     Trust B (50,000 x 10/27)   31,481 50,000 Less: income taxes already paid 10,000 20,000 30,000 Income tax due 8,519 11,481 20,000