Examples 4.1

Charlie enrolled in the Indemnity Health plan in January and has participated and remained enrolled for the entire year. He is not married and earns $140,000 per year as a salary. Charlie brought home an additional $1,300 over the course of the year after enrolling in the Indemnity Health plan. Charlie 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 Charlie’s tax return, he must calculate the exact amount of indemnity benefit payments that must be reported on his tax return. Charlie must add up all his out-of-pocket qualified medical expenses. 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.

Charlie 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. Charlie also notices that his W-2 reflects a lower amount for gross wages because the Indemnity Health plan’s premium payments ($600 per month) are paid through a Section 125 cafeteria plan salary reduction. Therefore, instead of $140,000, Charlie will list $132,800 as wages on his personal tax return. Claiming $6,000 in indemnity benefit payments brings Charlie’s adjusted gross income (AGI) to $139,800. Charlie does not itemize his deductions and, therefore, deducts the standard deduction from his AGI. This further reduces Charlie’s taxable income for the year If Charlie did not enroll and participate in the Indemnity Health plan for the entire year, his tax liability would have been greater by approximately $300. The Indemnity Health plan saved his federal tax, he brought home an additional $1,300 throughout the year, and he received the health benefits of the plan.

Linda enrolled in the Indemnity Health plan in January and has participated and remained enrolled for the entire year. She is not married and earns $125,000 per year as a salary. Linda brought home an additional $1,300 over the course of the year after enrolling in the Indemnity Health plan. Linda 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 Linda’s tax return, she must calculate the exact amount of indemnity benefit payments that must be reported on her tax return. Linda must add up all her out-of-pocket qualified medical expenses. 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.

Linda 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 dental expenses. Linda 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. Linda also notices that her W-2 reflects a lower amount for gross because the Indemnity Health plan’s premium payments ($600 per month) are paid through a Section 125 cafeteria plan salary reduction. Therefore, instead of $125,000, Linda will list $117,800 as wages on her personal tax return. Claiming $3,000 in indemnity benefit payments brings Linda’s adjusted gross income (AGI) to $120,800. Linda does not itemize her deductions and, therefore, deducts the standard deduction from her AGI. If Linda did not enroll and participate in the Indemnity Health plan for the entire year, her tax liability would have been greater by about $1,000 in federal tax. In addition, Linda remembers she brought home an additional $1,300 throughout the year.

 Colin enrolled in the Indemnity Health plan in January and has participated and remained enrolled for the entire year. He is not married and earns $125,000 per year as a salary. Colin brought home an additional $1,300 over the course of the year after enrolling in the Indemnity Health plan. Colin 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 Colin’s tax return, he must calculate the exact amount of indemnity benefit payments that must be reported on his tax return. Colin must add up all his out-of-pocket qualified medical expenses. 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.

Colin looks at his records and sees that he had $6,500 in out-of-pocket qualified medical. This consisted of $700 in prescriptions, $1,400 in co-payments to physicians, $4,000 to the hospital for certain procedures, and $400 for ambulance services. Colin will deduct the $6,500 in qualified out-of-pocket medical expenses from the $6,000 in indemnity benefit payments he receives. Because his out-of-pocket qualified medical expenses were more than the indemnity benefit payments, he will not report any amount on Schedule 1, line 8 of his personal tax return. Colin also notices that his W-2 reflects a lower amount for gross wages because the Indemnity Health plan’s premium payments ($600 per month) are paid through a Section 125 cafeteria plan salary reduction. Therefore, instead of $125,000, Colin will list $117,800 as wages on his personal tax return. Colin’s adjusted gross income (AGI) is $117,800. Colin also deducts the standard deduction from his AGI. The Indemnity Health plan saved Colin approximately $1,700 in federal tax. In addition, Colin remembers he brought home an additional $1,300 throughout the year.  He also received the health benefits of the plan.