Law Summary
Income Tax Rates on Individual Taxpayers
- Specifies income tax rates for individual citizens and resident aliens based on taxable income brackets.
- Tax rates range from 5% for income not exceeding P10,000, scaling up to 32% for income over P500,000.
- Married individuals compute income tax separately; income not attributable to either spouse is equally divided.
- Statutory minimum wage earners are exempt from income tax on their taxable income.
- Holiday pay, overtime pay, night shift differential pay, and hazard pay for minimum wage earners are tax-exempt.
Optional Standard Deduction in Computing Taxable Income
- Taxpayers earning compensation under employer-employee relationships have limited deductions.
- Individuals (except nonresident aliens) may elect a standard deduction up to 40% of gross sales or receipts.
- Corporations may similarly elect a 40% deduction on gross income.
- Election must be declared in tax return and is irrevocable for that taxable year.
- Electing individuals are exempt from submitting financial statements but must maintain records as prescribed.
Personal and Additional Exemptions
- Basic personal exemption of P50,000 per individual taxpayer is allowed.
- For married taxpayers with only one earning income, only that spouse claims the exemption.
- Additional exemption of P25,000 allowed per dependent, maximum of four dependents.
- Only one spouse may claim additional exemptions for dependents.
- For legally separated spouses, the one with child custody may claim the exemption, subject to maximum limits.
- Dependents defined as legitimate, illegitimate, or legally adopted children under 21 years, unmarried, not gainfully employed, or any dependent incapable of self-support due to mental or physical defects.
Income Tax Return Filing Requirements
- Specifies individuals required and exempted from filing income tax returns.
- Exemptions include individuals earning only pure compensation income with correct withholding, except those with multiple employers.
- Minimum wage earners and those exempt by other laws need not file income tax returns.
Withholding Tax on Wages
- Employers must withhold income tax on wages paid, except for minimum wage earners.
- Withholding rules to be prescribed by the Secretary of Finance, upon Commissioner’s recommendations.
Separability Clause
- Invalidity of any provision does not affect other provisions still effective.
Repealing Clause
- Any laws, decrees, orders, or regulations inconsistent with this Act are repealed or modified accordingly.
Effectivity Clause
- The Act takes effect 15 days after publication in the Official Gazette or two newspapers of general circulation.