Estate Tax Taxation

1. Taxation 2 │
DEDUCTIONS FROM GROSS ESTATE
FLABERT VILLASENCIO, CPA
Notre Dame of Dadiangas University

2. Deductions
oAre items allowed by law to be deducted to
the gross estate in order to arrive at the net
taxable estate.
oOnly those allowed by law shall be claimed
as deduction.
oThese items must be able to justify and
should be proved that the expenses really
exist.

3. ORDINARY
SPECIAL
Expense
sLosses
Indebtedness
Taxes
Transfer for public use
Amount received by heir under RA 4917
Vanishing deductions
Share of surviving spouse
Funeral
Judicial Claims against the estate
Claims against insolvent person
Family home
Medical Expenses
Standard deduction

4. Funeral Expenses
oActual funeral expenses means cost
incurred in connection with the internment
or burial of the deceased with official
receipts
oThe amount allowed as deductions shall
equal to the ACTUAL EXPENSES incurred OR
the 5% of the GROSS ESTATE whichever is
LOWER but in NO CASE shall exceed P200,000.

5. Example. Compute the amount deductible funeral
expenses in each of the following cases:
Case Gross estate Actual Funeral Expenses
1 P500,000 P70,000
2 2,000,000 90,000
3 4,500,000 185,000
4 5,000,000 220,000
Funeral Expenses

6. Answers:
Funeral Expenses

7. o Funeral expenses shall consist of the following
o Internment and/or cremation fees
o Mourning apparel of the surviving spouse and unmarried
minor children of the deceased bought and used on the
occasion of the burial
o Expenses for the decedent’s wake, including food and drinks
before the burial
o Fees and charges for the rites and ceremonies incident to the
burial
o Expenses for the death notices published, telegrams and
cable grams sent to the relatives of the deceased; and
o Cost of the burial lot, tombstone or monument but not their
upkeep. In case it is a family lot, the lot of the deceased shall
only be deductible.
Funeral Expenses

8. Example. Chit Sharon’s gross estate is P3,000,000. Her executor is
claiming the following as funeral expenses related to the death of
Chit:
Hospitalization incurred during the last 3 months prior to Chit’s death P50,000
Burial lot, 20% are paid from friends contribution 50,000
Expenses for wake before burial 20,000
Thank you cards to the sympathizers 2,000
Telegrams and cables sent to the relatives 1,000
Mourning apparel of the surviving spouse and children 3,000
Mourning apparel of the relatives 1,000
Entertainment expenses during the rites and ceremonies during burial 2,500
How much is the allowable funeral expense?
Funeral Expenses

9. Burial lot (P50,000 x 80%) P40,000
Expenses for wake before burial 20,000
Telegrams and cable to relatives 1,000
Mourning apparel of the surviving spouse and
children
3,000
Entertainment expenses during the rites and
burial ceremonies
2,500
Allowable funeral expenses P66,500
Answer:
Funeral Expenses

10. Judicial expenses
oAre allowed deductions incurred for the
administration, inventory taking of assets,
and settlement of the estate.
oTo be deductible, judicial expenses should
be incurred during the settlement of estate
but not beyond the last day prescribed by
law, or the extension thereof, for the filing of
the estate tax return.

11. ▪include
–Fees of executor or administrator
–Attorneys fee
–Court fees
–Accountant fees
–Appraisers fees
–Clerk hire
–Costs of preserving and distributing the estate
–Costs of storing or maintaining property of the
estate and
–Brokerage fees for selling property of the estate.
Judicial expenses

12. oExpenses not essential to the proper settlement of
the estate but incurred for the individual benefit of
the heirs, legatees, or devisees are not allowed as
deductions. Thus, the following are not allowed as
deductions:
o Attorney’s fees incident to litigation incurred by the heirs in
asserting their respective rights or claims as to who are entitled to
the estate left by the deceased;
o Premiums paid by a judicial administrator on his bond are not
deductible because the ability of the appointee to give bond in in the
nature of a qualification
o Compensation of trustees such expenses being for the account and
benefit not of the estate but of the beneficiaries.
Judicial expenses

13. Example. Malakas and Maganda had a disagreement
in the sharing of inheritance of the estate of their
parents. The disagreement prompted both parties to
bring the matter to the court. Both of them incurred
and paid attorney’s fees incident to litigation.
a.Are the expenses borne by the opposing parties
deductible from gross estate under judicial
expenses?
Answer: No
Judicial expenses

14. Casualty losses
oAll losses incurred during the settlement of the
estate arising from theft, robbery embezzlement,
fire, shipwrecks, storms and other calamities.
oCasualty losses can be claimed as long as: the
amount of loss is not compensated for by any
insurance or extra judicial settlement; and
oThey have not been claimed as deduction from
gross income for purposes of income tax
computation.

15. Claims against the estate
oPertains to debts which are properly chargeable and
enforceable against the estate.
oTo be deductible, the following requisites must be complied
oThe liability represents a personal obligation of the
deceased existing at the time of his death except unpaid
obligations incurred incident to his death such as unpaid
funeral expenses and unpaid medical expenses.
oThat the liability was contracted in good faith and for an
adequate and full consideration in money or money’s worth
oThe claim must be a debt or claim which is valid in law and
enforceable in court
oThe indebtedness must not have been condoned by the
creditor or the action to collect from the decedent must not
have prescribed.

16. Example. Doris borrowed P50,000 from her friend,
Sabel. Before indebtedness was paid, Doris died.
a.Is the unpaid obligation deductible from the gross
estate of Doris?
b.How about if its deductibility would leave nothing to
be distributed among the heirs?
c.How about if Sabel decides to condone the debt?
ANSWERS: YES; YES; NO
Claims against the estate

17. ▪A requisite for its deductibility is
that the value of the decedent’s
interest therein is included in the
value of the gross estate and that
the debtors are incapable of
paying their indebtedness.
Claims against Insolvent Person

18. Example. Bolalin borrowed P150,000 from Arturo.
After a month, the debtor paid P50,000. before the
remaining balance of P100,000 was paid, Arturo died.
Prior to his death, the court declared Bolalin
insolvent. The total assets and total liabilities of the
debtor amount to P200,000 and P500,000,
respectively. How much bad debt is deductible from
the estate of Arturo?
Remaining debt of Bolalin P100,000
Less: Recoverable amount (2/5 x P100k) 40,000
Amount deductible P 60,000
Claims against Insolvent Person

19. Unpaid Mortgages
oThese are unpaid indebtedness or loans
secured by debtor’s property, contracted in
good faith and for an adequate and full
consideration in money or money’s worth.
oTo be deductible, the property mortgaged
must be part of the gross estate at FMV.

20. Unpaid taxes
▪ Refer to taxes incurred prior to the date of
the decedent’s death and remained unpaid
as of the date of death.
DEATH
Before
Deductible
After
Non-deductible

21. SEATWORK: (1/2 CW)
4-5
4-10 TO 4-19
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