BUSINESS AND TRANSFER TAXATION 2019

Chapter 4

ESTATE TAX – DEDUCTIONS FROM GROSS ESTATE

DEDUCTIONS FROM GROSS ESTATE

There are charges which naturally diminish the amount of the inheritance of the heirs. Hence, the
law allows deductions from gross estate. In addition to these charges, the law also allows certain
deductions in the nature of incentives from gross estate.

PRESENTATION OF DEDUCTIONS IN THE ESTATE TAX RETURN

Exclusive Conjugal/ Total

Communal
GROSS ESTATE P xxx,xxx P xxx,xxx P xxx,xxx
Less: Ordinary Deductions
Actual funeral expense xxx,xxx xxx,xxx xxx,xxx
Judicial Expenses xxx,xxx xxx,xxx xxx,xxx
Claims against the estate xxx,xxx xxx,xxx xxx,xxx
Claims against insolvent person xxx,xxx xxx,xxx xxx,xxx
Unpaid mortgages xxx,xxx xxx,xxx xxx,xxx
Property previously taxed xxx,xxx xxx,xxx xxx,xxx
Transfer for public use xxx,xxx xxx,xxx xxx,xxx
Others xxx,xxx xxx,xxx xxx,xxx
Estate after deductions P xxx,xxx P xxx,xxx P xxx,xxx
Less: Special Deductions
Family Home xxx,xxx
Standard Deduction xxx,xxx
Medical Expenses xxx,xxx
Others xxx,xxx
Net Estate P xxx,xxx
Less: Share of the surviving spouse x 1/2 xxx,xxx
NET TAXABLE ESTATE P xxx,xxx

Note: Only the “Conjugal/Communal” column is filled if the decedent is married.

CLASSIFICATION OF DEDUCTIONS
A. Ordinary Deductions
B. Special Deductions
C. Share of the surviving spouse

Ordinary deductions generally include items which diminish the amount of the inheritance. The
only exception here is the deduction for “Property previously taxed” which is a tax incentive but
is classified as ordinary deductions in pursuant to the new estate tax form.

Special deductions are items which do not reduce the inheritance but are nonetheless allowed by
the law as deductions against gross estate in the determination of the new taxable estate.

Share of the surviving spouse pertains to the interest of the surviving spouse in the net conjugal
or communal properties of the spouses. This portion is not owned by the decedent and will not be
transmitted by the decedent as part of the inheritance; hence it must be removed in the
determination of the taxable estate.

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GENERAL PRINCIPLES OF ESTATE DEDUCTIONS
1. The substantiation rule
All items of deductions must be supported with documentary evidence such as receipts,
invoices, contracts, financial statements and other proofs that they actually or occurred to
establish their validity. The only exception to this rule is the deduction allowed for
“Standard deduction”.

2. Matching Principle
An item of deduction must be part of the gross estate to be deductible therefrom. No
deduction is allowed for those which are not part of the gross estate.

3. ‘No double classification rule’

An item of deduction cannot be claimed under several deduction classifications. Only one
classification is allowable.

4. Default presumption on ordinary deduction

In the case of married decedents, ordinary deductions are presumed to be against the
common properties unless proven to be exclusive.

ORDINARY DEDUCTIONS

Under current usage, the following are deemed ordinary deductions:

1. Expenses, Losses, Indebtedness and taxes (ELIT)
2. Transfer for Public Use
3. Vanishing Deductions

EXPENSES, LOSSES, INDEBTEDNESS AND TAXES (ELIT)

ELIT consist of:
1. Funeral Expenses (Removed in TRAIN Law)
2. Judicial Expenses (Removed in TRAIN Law)
3. Losses
4. Indebtedness, such as claims against the estate and unpaid mortgage
5. Taxes

FUNERAL EXPENSE
Funeral expenses include all the expenses of the death until interment, such as but not limited to:
1. The mourning apparel of the surviving spouse and unmarried minor children of the
deceased bought and used on the occasion of the burial;
2. Expenses for the deceased’s wake, including food and drinks;
3. Publication charges for death notices;
4. Telecommunication expenses incurred in informing relatives of the deceased;
5. Cost of burial plot, tombstones, monument or mausoleum but not their upkeep;
In case the deceased owns a family estate or several burial lots, only the value
corresponding to the plot where he is buried is deductible;
6. Interment and/or cremation fees and charge; and
7. All other expenses incurred for the performance of the rites and ceremonies incident to
interment.

REQUISITES FOR DEDUCTION OF FUNERAL EXPENSES

a. It must be expenses of the death of the decedent.
b. It must be supported by receipts, invoices or other evidence to show that they are actually
incurred.
c. It must be incurred from the point of death until interment.

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Expenses of the deceased before death shall not be considered as funeral expenses.
Expenses as of the last illness will not form part of funeral expenses but should be claimed
as a separate item of deduction as “medical expense”.

Expenses incurred after interment such as prayers, masses, thanksgiving publications and
entertainment are also not deductible.

d. It must have been paid from or are chargeable against the properties of the decedent.
Any portion of the funeral and burial expenses borne or defrayed by relatives and friends of
the deceased are not deductible.

e. The deductible funeral expense must not exceed the whichever is lower of 5% of the gross
estate or P200,000.

In other words, the deductible funeral expense shall be the lowest of the actual funeral
expense, P200,000 or 5% of gross estate.

Limits under old laws- if the decedent died:

 Before January 1, 1973, funeral expenses are deductible up to 5% of the gross estate
(CA 466)
 From January 1, 1973 to July 27, 1992, funeral expenses are deductible up to 5% of
the gross estate but not to exceed P50, 000 (PD 96)
 From July 28, 1992 to December 31, 1997, funeral expenses are deductible up to 5%
of the gross estate but not to exceed P100,000 (RA 7499)
Note: Examinees of the CPA Board Exam are not required to memorize these old limits.

JUDICIAL EXPENSES (Removed in TRAIN Law)

Judicial expenses include those incurred in the inventory-taking of assets comprising the gross
estate, their administration, the payment of debts of the estate, as well as the distribution of the
estate among the heirs. Judicial expenses are claimable by any estate whether judicially or extra-
judicially settled.

Examples of judicial expenses:

1. Fees of executor or administrator;
2. Attorney’s fees;
3. Court fees;
4. Accountant’s fess;
5. Appraised fees;
6. Clerk hire;
7. Costs of preserving and distributing the state;
8. Costs of storing or maintaining property of the estate; and
9. Brokerage fees for selling property of the estate.

REQUISITES OF DEDUCTIBILITY OF JUDICIAL EXPENSES

a. If paid, it must be substantiated with receipts or invoice evidencing their validity.
b. Any unpaid amount for the aforementioned cost and expenses claimed under judicial
expenses should be supported by a sworn statement of account issued and signed by the
creditor.
c. The judicial expenses must be incurred within 6 months from the date of death of the
decedent.

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CLASSIFICATION OF FUNERAL EXPENSES
AND JUDICIAL EXPENSES
For married decedents, funeral expenses and judicial expenses are proper charges against the
common fund of the spouses. These are deducted under the “Conjugal/Communal” column in
ordinary deductions.

For single decedents whose properties are all exclusive, funeral expenses and judicial expenses are
presented under the “Separate” column. The “Conjugal/Communal” column is left blank.

It must be noted that medical expense is not an item of ordinary deduction but an item of special
deductions. It is not part of the ELIT group.

LOSSES

These pertains to losses of properties of the estate during the settlement of the estate are deductible
from gross estate. These may arise from fires, storms, shipwreck or other casualties or from
robbery, theft or embezzlement when such losses are not compensated for by insurance.

It must be emphasized that losses is deductible only if it occurs during the settlement of the estate
before the deadline of filling the estate tax return (i.e. within 6 months from death).

CLAIMS AGAINST INSOLVENT PERSON

Claims against insolvent persons is a form of loss but is presented as a separate item of deduction
in the tax return. The deductible amount of claim against insolvent person is the unrecoverable
amount of claim.

CLAIMS AGAINST THE ESTATE (INDEBTEDNESS)

The word “claims” as used in the statute is generally construed to mean debts or demands of a
pecuniary nature which could have been reduced to simple money judgements.

Claims against the estate or indebtedness in respect of property may arise out of contract, tort or
operations of law.

SPECIAL RULES ON CERTAIN CLAIMS AGAINST THE ESTATE

1. Unpaid mortgage
This includes mortgage upon, or any indebtedness, in respect to property where the value of
the decedent’s interest therein, undiminished by such mortgage or indebtedness is included
in gross estate.
2. Unpaid taxes
This includes taxes such as income tax, business tax and property tax which have accrued
as of the death of the decedent which were unpaid as of the time of death.
It must be emphasized that only obligations existing at the point of death are deductible.
Obligations including taxes which are settled before death and those accruing after death
are not deductible from gross estate.

Hence, the following taxes are non-deductible:

a. Tax on income earned after death
b. Property taxes accruing after death
c. Business taxes accruing after death
d. Estate tax on the transmission of the estate to the heirs

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3. Accommodation Loan
An accommodation loan is one contracted by a person in behalf of another person with the
contracting person merely representing in behalf other person who will be the beneficiary
of the loan proceeds.

REQUISITES OF DEDUCTIBILITY OF CLAIMS AGAINST THE ESTATE:

1. The liability represents a personal obligation of the deceased existing at the time of his death
except unpaid:
A. Funeral expenses (Removed in TRAIN Law)
B. Medical expenses (Removed in TRAIN Law)
2. The liability was contracted in good faith and for adequate and full consideration in money or
money’s worth;
3. The claim must be a debt or claim which is valid in law and enforceable in court;
4. The indebtedness must not have been condoned by the creditor or the action to collect from the
decedent must not have been prescribed.

TRANSFER FOR PUBLIC USE

Transfer for public use includes the amount of all bequests, legacies, devises or transfer to or for
the use of the Government of the Republic of the Philippines, or any political subdivision thereof,
for the exclusive public purposes. These must be indicated in the decedent’s last will and
testament.

PROPERTY PREVIOUSLY TAXED (VANISHING DEDUCTION)

There are instances where properties are transferred between persons in short periods of time
causing a series of transfer taxation.

Example:
a. The death of the decedent is preceded by a donation inter-vivos
b. The death of the decedent is preceded by a donation mortis causa.

REQUISITES OF VANISHING DEDUCTION:

1. Present decedent must have died within five (5) years from date of death of the prior
decedent or date of gift.
2. The property with respect to which the deduction is claimed must have been part of the
gross estate situated in the Philippines of the prior decedent or taxable gift of the donor
3. The property must be identified as the same property received from prior decedent or donor
or the one received in exchange therefore.
4. The estate taxes on the transmission of the prior state or the donors tax on the gift must
have been finally determined and paid.
5. No vanishing deduction on the property or the property given in exchange therefore was
allowed to the prior estate.

Procedural Computation: Vanishing Deduction

1. Determine the initial value

The initial value is the fair market value of the property at the date of the first transfer (i.e. date
of prior decedent’s date or date of gift) or the fair value at the date of death whichever is lower.

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2. Determine the initial basis

The initial basis is the initial value reduced by any indebtedness on the property which was
assumed and paid by the present decedent before his or her death.

This is computed as:

Initial value Pxxx,xxx

Less: Indebtedness assumed and paid before death xxx,xxx
Initial basis Pxxx,xxx

3. Determine the final basis

The final basis is the initial basis reduced by a proportion of other ordinary deductions (i.e.
ELIT + transfer for public purpose or ELITT) which the initial basis bears over the gross estate
of the decedent.

This is computed as:

Initial basis Pxxx,xxx

Less:
(Initial basis/Gross Estate) x (ELITT) xxx,xxx
Final basis Pxxx,xxx

4. Determine the vanishing deduction

The vanishing deduction is the final basis multiply by the following vanishing percentages:

If the decedent died within Vanishing Percentage

1 year from receipt of property 100%
2 years from receipt of property 80%
3 years from receipt of property 60%
4 years from receipt of property 40%
5 years from receipt of property 20%
More than five years 0%

Note: Ordinary deductions are allowable to all types of decedents, residents, citizens or non-
resident alien decedents.

SPECIAL DEDUCTIONS

The following are considered special deductions:

1. Family home
2. Standard deductions
3. Medical expenses (Removed in TRAIN Law)
4. Benefits under RA4917

FAMILY HOME

Family home includes the dwelling house, including the land on which it is situated, where the
decedent and or members of his family reside as certified by the Barangay Captain of the locality.

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

REQUISITES FOR DEDUCTION OF FAMILY HOME

1. 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.
2. The value of the family home must be included as part of the gross estate of the decedent;
and
3. The allowable deduction must not exceed the lowest of fair market value of the family
home as declared or included in gross estate. The extent of the decedent’s interest therein or
P10,000,000.

STANDARD DEDUCTION
A deduction in the amount of P5,000,000 shall be allowed as an additional deduction without the
need of substantiation. The full amount of P5,000,000 shall be allowed as deduction for the benefit
of the decedent.

MEDICAL EXPENSES (Removed in TRAIN Law)

Medical expenses incurred (whether paid or unpaid) by the decedent within 1 year before the
death of the decedent shall be allowed as a deduction provided that the same are duly substantiated
with receipts, invoices, statement of accounts and such other documents provided further that the
amount thereof, whether paid or unpaid, does not exceed P500,000.

BENEFITS UNDER RA 4917

In pursuant to RA 4917 which took effect on June 17, 1967, the retirement benefit or termination
benefit received by employees of private firms is not subject to attachment, levy, execution or any
tax whatsoever.

In pursuant to the NIRC which took effect on January 1, 1998, any amount received by the heirs
from the decedent’s employer as a consequence of the death of the decedent-employee in
accordance with Republic Act No. 4917 is allowed as a deduction provided that the amount of the
separation benefit is included as part of the gross estate of the decedent.

SHARE OF THE SURVIVING SPOUSE

The share of the surviving spouse is one-half of the net conjugal or community properties of the
spouses.

After deducting the allowable deductions appertaining to the conjugal or community properties
included in the gross estate, the share of the surviving spouse must be removed to ensure that only
the decedent’s interest in the estate is taxed.

NOTE TO READERS: THE ORDINARY AND SPECIAL CLASSIFICATION

The classification ordinary deduction and special deduction is actually absent in the NIRC. The
NIRC merely listed the deductions allowable to residents or citizens and those allowed to non-
resident aliens. The ordinary and special classification exist only in the illustrative guidelines of
RR2-2003.

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Ordinary and special in their usual meaning

Ordinary deductions pertain to those charges that normally reduce the hereditary estate while
special deductions pertain to those that do not diminish the estate but are allowable deductions
under the law.

RULES ON CLAIMABLE DEDUCTIONS PER DECEDENT CLASSIFICATION

Resident or Citizen* Non-resident Alien

Ordinary Deduction ✓ ✓
Special Deduction ✓ X
Share of Surviving Spouse ✓ ✓

*Includes resident citizen, non-resident citizen and resident alien

DEDUCTIONS ALLOWED TO NON-RESIDENT ALIEN DECEDENTS

It should be emphasized that non-resident aliens cannot claim the special deductions. Non-resident
aliens can claim only the following deductions:
1. Prorated Expenses, Losses, Indebtedness and Taxes
2. Property previously taxed (Vanishing Deductions)
3. Transfer for public purpose
4. Share of the surviving spouse

PRORATED ELIT
The claimable deductible amounts of ELIT of non-resident aliens are pro-rated as follows:

Philippine Gross Estate x Expenses, Losses, Indebtedness and Taxes

World Gross Estate

The pro-rata treatment will normally result in terms of expenses, losses, indebtedness and taxes
being deducted at an amount different from their actual costs or value. However, this is the legal
treatment specified under Section (B) (1) of the NIRC.

PROPERTY PREVIOUSLY TAXED (VANISHING DEDUCTIONS)

The same vanishing deduction shall be deductible provided that the property subject to vanishing
deduction is included as part of gross estate. In other words, the property subject to vanishing
deduction must be within the Philippines at the date of death.

SUMMARY OF DEDUCTION RULES

Residents or Citizens Non-Resident Aliens
Funeral Expense YES
Judicial Expense YES
Losses YES
YES (Pro-rated)
Claims against the estate YES
Indebtedness YES
Taxes YES
Transfer for public use YES YES
Vanishing deductions YES YES
Family Home YES NO
Medical Expense YES NO
Standard deductions YES NO
Benefits under RA 4917 YES NO
Share of the surviving spouse YES YES

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