<p>Examples 2.2</p>
<i>
    Allison enrolled in the Indemnity plan in January and has participated and remained enrolled for the entire
    year. She is married and, with her spouse, earns $60,000 per year. Allison brought home an additional $600
    over
    the course of the year after enrolling in the Indemnity plan. Allison is wondering how much their tax
    liability
    will increase this year because she received $12,000 in indemnity benefit payments.
</i><br />

In order to determine how the indemnity benefit payments will affect Allison’s tax return, she must calculate
the exact amount of indemnity benefit payments that must be reported on her tax return. Allison must add up all
her, her spouse’s, and any dependents’ out-of-pocket qualified medical expenses. Once she knows the total amount
of out-of-pocket qualified medical expenses they spent she will deduct this amount from the total indemnity
benefit payments received.
<br /><br />
Allison looks at her records and sees that they did not have any out-of-pocket qualified medical expenses for
the year. As such, they report the entire amount of indemnity benefit payments for the year, $12,000, on
Schedule 1, line 8 of their personal tax return. Allison also notices that her W-2 reflects a lower amount for
gross because the Indemnity plan’s premium payments ($1,200 per month) are paid through a Section 125 cafeteria
plan salary reduction. Therefore, instead of $60,000, Allison will list $35,600 as her wages on their personal
tax return. Claiming $12,000 in indemnity benefit payments brings their adjusted gross income (AGI) on their
joint tax return to $47,600. They do not itemize their deductions and, therefore, deduct the standard deduction
from their AGI. This roughly cuts their taxable income for the year in half.. If Allison did not enroll and
participate in the Indemnity plan for the entire year, their tax liability would have been $greater. The
Indemnity plan saved them in federal tax. In addition, Allison remembers she brought home an additional $600
throughout the year in addition to the healthcare benefits of the plan.
<br /><br />
<i>
    Fred enrolled in the Indemnity plan in January and has participated and remained enrolled for the entire
    year.
    He is married and earns $50,000 per year as a salary. His spouse earns $10,000 per year as a salary.
    Together,
    they earn a total of $60,000 per year in earned income. Fred brought home an additional $600 over the course
    of
    the year after enrolling in the Indemnity plan. Fred is wondering how much their tax liability will increase
    this year because he received $12,000 in indemnity benefit payments.
</i><br />
In order to determine how the indemnity benefit payments will affect Fred’s tax return, he must calculate the
exact amount of indemnity benefit payments that must be reported on his tax return. Fred must add up all his,
his spouse’s, and any dependents’ out-of-pocket qualified medical expenses paid. Once he knows the total amount
of out-of-pocket qualified medical expenses they spent he will deduct this amount from the total indemnity
benefit payments received.
<br /><br />
Fred looks at his records and sees that they had $6,000 in out-of-pocket qualified medical expenses for the
year. This consisted of $2,700 in co-payments to physicians, $300 for glasses, $1,500 to the hospital for
certain procedures, and $1,500 in prescriptions. Fred will deduct the $6,000 in qualified out-of-pocket medical
expenses from the $12,000 in indemnity benefit payments he received. As such, they will report $6,000 of
indemnity benefit payments for the year on Schedule 1, line 8 of their personal tax return. Fred also notices
that his W-2 reflects a lower amount for gross because the Indemnity plan’s premium payments ($1,200 per month)
are paid through a Section 125 cafeteria plan salary reduction. This reduces the wages listed on the return.
Claiming $6,000 in indemnity benefit payments increases their adjusted gross income (AGI) on their joint tax
return. They do not itemize their deductions but deduct the standard deduction from their AGI. This reduces
their taxable income by approximately half. If Fred did not enroll and participate in the Indemnity plan for the
entire year, their tax liability would have been greater. In addition, Fred remembers he brought home an
additional $600 throughout the year.


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