Looking forward to Christmas and higher take home bonuses

IT’S 30 DAYS before Christmas and, though Christmas comes every year, most of us still get excited -- for the vacation days, the gifts, and, not least, the release of the 13th month pay.

Excitement over 13th-month pay was higher than usual this year because it looked like Congress might approve a higher tax exemption threshold for bonuses, raising the possibility of increased take-home pay at year’s end.

The House of Representatives is currently considering a threshold of P70,000 for tax-exempt 13th-month pay, up from P30,000 previously. House Bill 9470 has already been approved on third reading and transmitted to the Senate.

Meanwhile the Senate has approved on second reading the corresponding Senate Bill, which seeks to exempt P82,000 worth of bonuses from tax. According to the sponsors, this is the true current value of the original P30,000 cap when this law was approved in 1994.

Apparently, the higher exemption thresholds are not happening in 2014. Any enacted law is likely be implemented next year.

Nevertheless the higher thresholds remain a significant development for every employee.

How much will an employee benefit from the higher exemption?

Assuming that the employee’s total gross income is subject to the maximum rate of 32%, the differential between the current tax treatment and the proposed regime is as follows, for an employee earning P50,000 a month:

The increase in take-home pay is P16,000 for the employee and a decline in tax collections for the Bureau of Internal Revenue by a similar amount.

One of the major objections to increasing the tax exemption is the loss of income on the part of the government.

We note though that most estimates of the revenue loss did not take into consideration the additional income of the employee, which would lead to increased spending and create income for business establishments he patronizes.

The threshold for tax exemptions on 13th-month pay and other bonuses is an important form of tax relief given by the Government to salary earners, who are entitled to no other deduction apart from the personal exemption of P50,000 and,if applicable, additional personal exemptions of P25,000 for each qualified dependent up to a maximum of four.

Given that this privilege of P30,000 tax-exemption ceiling was crafted 20 years ago, I believe it is really time adjust the amount to a level equivalent to its 1994 value today.

While we are still at the P30,000 tax exemption, it is prudent for the companies to ensure that all the items that can be included in the ceiling of the tax exemption are properly considered so that the employee can fully enjoy the tax exemption and the net take home pay.

The least that the company can do is to ensure that the employees are not deprived of the only tax relief they can have.

 Richard R. Ibarra

Let’s Talk Tax

Punongbayan and Araullo