Examples 4.2

Grace enrolled in the Indemnity Health plan in January and has participated and remained enrolled for the entire year. She is married and earns $125,000 per year as a salary. Her spouse earns $150,000 per year as a salary. Together, they earn a total of $275,000 per year in earned income. Grace brought home an additional $1,900 over the course of the year after enrolling in the Indemnity Health plan. Grace is wondering how much their tax liability will increase this year because she received $9,000 in indemnity benefit payments.

In order to determine how the indemnity benefit payments will affect Grace’s tax return, she must calculate the exact amount of indemnity benefit payments that must be reported on her tax return. Grace 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.

Grace 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, $9,000, on Schedule 1, line 8 of their personal tax return. Grace also notices that her W-2 reflects a lower amount for gross wages because the Indemnity Health plan’s premium payments ($900 per month) are paid through a Section 125 cafeteria plan salary reduction. Therefore, instead of $125,000, Grace will list $114,200 as her wages on their personal tax return. Claiming $9,000 in indemnity benefit payments brings their adjusted gross income (AGI) on their joint tax return to $273,200. They do not itemize their deductions and, therefore, deduct the standard deduction from their AGI. This reduces their taxable income, and the Indemnity Health plan saved them approximately $400 in federal tax. In addition, Grace remembers she brought home an additional $1,900 throughout the year.

Gavin enrolled in the Indemnity Health plan in January and has participated and remained enrolled for the entire year. He is married and earns $125,000 per year as a salary. His spouse earns $150,000 per year as a salary. Together, they earn a total of $275,000 per year in earned income. Gavin brought home an additional $1,900 over the course of the year after enrolling in the Indemnity Health plan. Gavin is wondering how much their tax liability will increase this year because he received $9,000 in indemnity benefit payments.

In order to determine how the indemnity benefit payments will affect Gavin’s tax return, he must calculate the exact amount of indemnity benefit payments that must be reported on his tax return. Gavin must add up all his, his spouse’s, and any dependents’ out-of-pocket qualified medical expenses. 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.

Gavin looks at his records and sees that they had $4,500 in out-of-pocket qualified medical expenses. This consisted of $1,100 in co-payments to physicians, $400 for glasses, $2,100 to the hospital for certain procedures, and $900 in dental expenses. Gavin will deduct the $4,500 in qualified out-of-pocket medical expenses from the $9,000 in indemnity benefit payments he received. As such, they will report $4,500 of indemnity benefit payments for the year on Schedule 1, line 8 of their personal tax return. Gavin also notices that his W-2 reflects a lower amount for gross wages because the Indemnity Health plan’s premium payments ($900 per month) are paid through a Section 125 cafeteria plan salary reduction. Therefore, instead of $125,000, Gavin will list $114,200 as his wages on their personal tax return. Claiming $4,500 in indemnity benefit payments brings their adjusted gross income (AGI) on their joint tax return to $268,700. They utilize the standard deduction from their AGI, which further reduces their income. The Indemnity Health plan saved them approximately $1,500 in federal tax. In addition, Gavin remembers he brought home an additional $1,900 throughout the year.

Rachel enrolled in the Indemnity Health plan in January and has participated and remained enrolled for the entire year. She is married and earns $125,000 per year as a salary. Her spouse earns $150,000 per year as a salary. Together, they earn a total of $275,000 per year in earned income. Rachel brought home an additional $1,900 over the course of the year after enrolling in the Indemnity Health plan. Rachel is wondering how much their tax liability will increase this year because she received $9,000 in indemnity benefit payments.

In order to determine how the indemnity benefit payments will affect Rachel’s tax return, she must calculate the exact amount of indemnity benefit payments that must be reported on her tax return. Rachel 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. 

Rachel looks at her records and sees that they had $10,000 in out-of-pocket qualified medical expenses for the year. This consisted of $1,000 in prescriptions, $2,500 in co-payments to physicians, $6,000 to the hospital for certain procedures, and $500 for ambulance services. Rachel will deduct the $10,000 in qualified out-of-pocket medical expenses from the $9,000 in indemnity benefit payments she received. Because their out-of-pocket qualified medical expenses were more than the indemnity benefit payments, they will not report any amount on Schedule 1, line 8 of their personal tax return. Rachel also notices that her W-2 reflects a lower amount for gross wages because the Indemnity Health plan’s premium payments ($900 per month) are paid through a Section 125 cafeteria plan salary reduction. Therefore, instead of $125,000, Rachel will list $114,200 as her wages on their personal tax return. Their adjusted gross income (AGI) on their joint tax return is $264,200. They do not itemize their deductions and instead deduct the standard deduction from their AGI. The Indemnity Health plan saved them approximately in federal tax. In addition, Rachel remembers she brought home an additional $1,900 throughout the year, plus the health benefits for her and her family.