Examples 2.1
Curtis enrolled in the Indemnity plan in January and has participated and remained enrolled for the entire
year.
He is not married and earns $42,500 per year as a salary. Curtis brought home an additional $600 over the
course
of the year after enrolling in the Indemnity plan. Curtis is wondering how much his tax liability will
increase
this year because he received $6,000 in indemnity benefit payments.
In order to determine how the indemnity benefit payments will affect Curtis’s tax return, he must calculate the
exact amount of indemnity benefit payments that must be reported on his tax return. Curtis must add up all his
out-of-pocket qualified medical expenses paid throughout the year. Once he knows the amount of his out-of-pocket
qualified medical expenses he will deduct this amount from the total indemnity benefit payments he received.
Curtis looks at his records and sees that he did not have any out-of-pocket qualified medical expenses for the
year. As such, he will report the entire amount of indemnity benefit payments for the year, $6,000, on Schedule
1, line 8 of his personal tax return. Curtis also notices that his W-2 reflects a lower amount for gross wages
because the Indemnity plan’s premium payments ($600 per month) are paid through a Section 125 cafeteria plan
salary reduction. Therefore, instead of $42,500, Curtis will list $35,300 as wages on his personal tax return.
Claiming $6,000 in indemnity benefit payments brings Curtis’s adjusted gross income (AGI) to $41,500. Curtis
does not itemize his deductions and, therefore, deducts the standard deduction from his AGI. If Curtis did not
enroll and participate in the indemnity plan for the entire year, his tax liability would have been greater. The
Indemnity plan saved Curtis in federal tax. In addition, Curtis remembers he brought home an additional $600
throughout the year.
Jane enrolled in the Indemnity plan in January and has participated and remained enrolled for the entire
year.
She is not married and earns $42,500 per year as a salary. Jane brought home an additional $600 over the
course
of the year after enrolling in the Indemnity plan. Jane is wondering how much her tax liability will
increase
this year because she received $6,000 in indemnity benefit payments.
In order to determine how the indemnity benefit payments will affect Jane’s tax return, she must calculate the
exact amount of indemnity benefit payments that must be reported on her tax return. Jane must add up all her
out-of-pocket qualified medical expenses paid throughout the year. Once she knows the amount of her
out-of-pocket qualified medical expenses she will deduct this amount from the total indemnity benefit payments
she received.
Jane looks at her records and sees that she had $3,000 in out-of-pocket qualified medical expenses. This
consisted of $500 in co-payments to physicians, $400 for prescriptions, $1,700 to the hospital for certain
procedures, and $400 in medical devices. Jane will deduct the $3,000 in qualified out-of-pocket medical expenses
from the $6,000 in indemnity benefit payments she receives. As such, she will report $3,000 of indemnity benefit
payments for the year on Schedule 1, line 8 of her personal tax return. Jane also notices that her W-2 reflects
a lower amount for gross because the Indemnity plan’s premium payments ($600 per month) are paid through a
Section 125 cafeteria plan salary reduction. Therefore, instead of $42,500, Jane will list $35,300 as wages on
her personal tax return. Claiming $3,000 in indemnity benefit payments brings Jane’s adjusted gross income (AGI)
to $38,300. Jane does not itemize her deductions and, therefore, deducts the standard deduction from her AGI.
This lowers Jane’s taxable income for the year. If Jane did not enroll and participate in the indemnity plan for
the entire year and did not have medical expenses, her tax liability would have been greater. The indemnity plan
saved Jane in federal tax, increased her net take home throughout the year, and provided healthcare benefits.