Tax Planning
What the domain tests
Tax planning tests legal ways to reduce tax across income, investments, business, retirement, and transfers, without crossing into evasion.
Core rules
- Individual income tax is graduated; the first P250,000 of taxable income is zero-rated.
- Self-employed individuals and professionals may choose itemized deductions or the 40% optional standard deduction (OSD).
- Passive income: interest generally 20% final tax; dividends 10% final tax; stock transactions 0.6%.
- Estate tax is 6% of net estate; donor's tax is 6% over P250,000 of annual gifts.
- Tax avoidance uses legal provisions; tax evasion is illegal and penalized.
Worked example
A self-employed consultant has P1,000,000 gross receipts and P300,000 expenses. Itemized: taxable P700,000. Tax = P30,000 + 25% × (P700,000 − P400,000) = P105,000. OSD: 40% × P1,000,000 = P400,000 deduction; taxable P600,000; tax = P30,000 + 25% × P200,000 = P80,000. OSD saves P25,000. Reasoning: compare the two allowed methods each year.
Traps
Forgetting the P250,000 zero bracket; applying graduated rates to passive income; claiming personal exemptions that no longer apply; mixing estate tax with capital gains tax; backdating documents.