How To Pay Less Income Tax
By Eric Chan, RFP®
Let’s face it. None of us, in general, enjoy paying taxes. Aside from biting a huge chunk out of our take home pay, it doesn’t do us any good hearing and reading stories of mismanagement of funds (read: North Rail Pillars). I hardly feel it working for me, if I even feel it working at all; and I don’t think I’m the only one who’s saying this. As long as there are taxes to be paid, people since the beginning of time, had thought of ways not to pay it. (As I have said, nobody enjoys paying taxes).
Although pay we must, it doesn’t mean we can’t find ways to reduce this liability. Tax avoidance and tax evasion are two different things. While their objective is the same: to pay the least possible amount of tax; the former is legal while the latter, well, let’s just say can land you in jail, and if you’re somebody, you might even headline the news.
Severo Marano, a Certified Public Accountant, defines tax avoidance as, “Tax avoidance uses technicalities such as loopholes in the tax laws to reduce the taxes payable.”
Seriously, there are loopholes? And we thought everything is as clear as day and night when it comes to taxes. You’d think the government had managed to plug all holes by now to increase its collections.
“Tax evasion, on the other hand, is the wilful attempt to evade the payment of taxes either misrepresenting or concealing their actual income, or non-issuance of official receipts even if there was a sale transaction in order to avoid paying lower income tax,” Marano clarifies.
He cites an example of tax avoidance: “If the company is to choose between straight line method of depreciation or double declining method, our tax laws are silent as to which method you should adopt. This is an opportunity for tax avoidance.” Tax avoidance allows us to go around the law and minimize the taxes payable.
Corporations can also maximize the allowable deductions under the National Internal Revenue Code, which also includes premium payments on health and/hospitalization insurance, pension trust and charitable contributions. These deductions benefit the company, its employees and even the society. It’s hitting two (or even three) birds with one stone!
Individuals can also do the same. Unfortunately, not all of us know what exemptions we are entitled to just as we are clueless to what our rights are. The law allows P50,000 exemption for single individuals, head of the family and even married individual. The law also allows additional exemption of P25,000 for each child or dependent (maximum of four), which by definition include senior citizens. So if your parents or even grandparents are dependent on you, then you may even add those to your exemptions. Add them altogether, a single individual can have a maximum exemption of P150,000.
It’s also worth knowing that parents of special children will be entitled to a P50,000 deduction once Bill No. 5100, authored by none other than former President and now Pampanga Rep. Gloria Macapagal Arroyo, and co-authored by her son, is passed into law. The bill seeks to ease the burden of the parents who have special children.
And once the Implementing Rules and Regulations (IRR) of the Personal Equity Retirement Account (PERA) are approved, the employees can avail a 5% tax credit for their contributions. This can further encourage the public to maximize their contributions. There are ways to for us to lower our tax obligations, but evasion is not one of them. But as much as it is the duty of every citizen to pay the proper taxes, it is also our right to find ways of legally avoiding it.
Eric Chan, RFP is a Registered Financial Planner (RFP) of RFP Philippines. He is financial advisor for one of the leading financial institutions in the country. To learn more about the RFP program, visit www.rfp.ph or inquire at info@rfp-philippines.com or call 6342204.
My wife is not working but her widowed mother has an autistic son. Can I include her mother and/or her brother as dependent?
Hi Jimbo,
The following may help, but it may be best to consult with an accountant or tax lawyer.
Source:
[1] //businessonlinetalk.com/qualified-dependents-for-additional-allowable-exemptions-on-taxes/2011/12/21/
Response from Philippine Business Online Team
As with regards to you question on the qualified dependent, regulations 10-2008 is very clear on this and I quote:
Though the brother falls under one qualification, as such being a special person, however, the main qualification to be a qualified dependent is that such person be an offspring of the taxpayer.
Wow! Great info! thanks!
I can’t believe there are just a handful of comments. I would have thought getting back your money form the government would have gotten a lot of attention.
Hi, i would like to know more about how to lessen my tax obligations.. I am still single but i am the head of the family. My parents do not have work, i have a special child brother and another sibling who is in high school now. I am the only one supporting them.. one of the things that burdens me is my tax..it is paniful to see my payslip every month because of the deductions for tax.. the amount being deducted to me could have help my family more. Please help me how can i somehow increase ny exemptions and lessen my tax..thanks
Regarding comment by moneysense on June 13, 2012 at 1:18 pm, this would mean that the part in the article where it says the following is wrong:
“The law also allows additional exemption of P25,000 for each child or dependent (maximum of four), which by definition include senior citizens. So if your parents or even grandparents are dependent on you, then you may even add those to your exemptions. Add them altogether, a single individual can have a maximum exemption of P150,000.”
I live with my two sisters, aged 21 and 13, the older one is working now but the younger one obviously can’t and is dependent on the two of us although both of are parents are alive. None of them has claimed the youngest for tax exemptions of any sort. I also live with my grandparents, both legally senior citizens and both unemployed. Which of them (sister, or grandparents) could I claim as dependents?
I hold a regular job and I pay my taxes through our company. I am now offered a consultancy job. How will this additional income affect my payment of taxes?