Don’t pay the taxman just yet

There is a saying that there are only two things that are certain in life—death and taxes.

While this is true, there are some forms of income that are not subject to income tax because you have already paid your taxes on them.

This type of tax, which is normally deducted from your income before you receive it, is what the Bureau of Internal Revenue calls the Final Withholding Tax.

Under the Tax Code of the Philippines, all types of income that have been subject to Final Withholding Tax are already complete and therefore should no longer be included as taxable income in your return.

If you are investing your savings in property or stock market, here are the five most common investment gains you should know that you need not pay income tax on anymore:

1. Interest income

The interest income that you earn from the bank is normally subject to 20-percent final tax. When you receive your interest, the tax is already deducted from it before it is credited to your account.

Because the final tax is already paid for when you earned the interest, you don’t have to include this in your annual income tax anymore.

For example, if you invest in bonds or Treasury bills that pay gross interest rate of 6 percent, you will need to assume that what you will earn is only a net of 4.8 percent because you need to pay a final tax of 20 percent.

2. Dividend income

If you are investing in the stock market, there are stocks that regularly pay dividends once or several times in a year. The dividends that you receive are subject to final tax of 10 percent.

Similar to interest income, dividend income shall be deducted by 10 percent final tax before it is credited to your account.

For example, if you invest in preferred stocks where you earn a dividend yield of 6 percent, you can assume that your net dividend yield will only be 5.4 percent.

3. Gains from sale of publicly traded stocks

If you trade stocks regularly, you shall be automatically charged a capital gain tax of 0.6 percent every time you sell your stocks.

Your transaction shall be liable to capital gain tax, which serves as your final tax, even if you sell your stocks at a loss.

For example, if you bought your stock at P100,000 and you sold it at a loss for P90,000, the proceeds that you should expect to receive would be reduced by the amount of capital gain tax, aside from the brokerage commission and other minor charges.

If, on the other hand, you sold your stocks for profit at P110,000, the same capital gain tax percentage shall apply to your proceeds but you don’t need to declare the profit you made from trading transaction as part of your taxable income.

4. Gains from sale of real estate

Unless you are in the business of buying and selling of real estate, there is no need for you to declare the income you make from property value appreciation when you sell your house or condominium in your annual income tax return.

This is because when you sell your real estate asset, the whole transaction shall be subject to capital gains tax of 6 percent.

Again, similar to the sale of publicly listed stocks, you shall automatically pay capital gain tax even if you sell your property at a loss.

Bear in mind that the final tax is applicable only to sale of real estate properties that have been held as personal investment.

For example, if you buy a house with the intention of holding it as a long-term investment because you intend to reside there, the house shall be considered a capital asset and therefore subject to final tax when you sell it.

If you buy a house with the intention of selling it immediately for profit within the year to buy another property for sale, your transactions may be subject to ordinary income tax because your activity may be considered regular business.

5. Gains from sales of mutual fund shares

Perhaps investing in mutual funds offers the best tax incentive of all.

This is because there is no capital gains tax on redemption of mutual fund shares.

When you invest in mutual funds, you deposit your money into the mutual fund company, which pools your money with other investors and invest in various securities such as bonds and stocks.

When the market value of the investment holdings of the mutual fund appreciates, its net asset value per share will also increase that gives you opportunity to make money by selling your shares.

Unlike in the stock market, you can only sell your mutual fund shares back to the company and not to other investors. The gains you make from selling your mutual fund shares are no longer taxable on your part. —CONTRIBUTED