Examples 5.1

Perry enrolled in the Indemnity Health plan in January and has participated and remained enrolled for the entire year. He is not married and earns $200,000 per year as a salary. Perry brought home an additional $1,500 over the course of the year after enrolling in the Indemnity Health plan. Perry 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 Perry’s tax return, he must calculate the exact amount of indemnity benefit payments that must be reported on his tax return. Perry must add up 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.

Perry looks at his records and sees that he did not have any out-of-pocket qualified medical expenses. 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. Perry 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 $200,000, Perry will list $192,800 as wages on his personal tax return. Claiming $6,000 in indemnity benefit payments brings Perry’s adjusted gross income (AGI) to $198,800. Perry does not itemize his deductions and, therefore, deducts the standard deduction from his AGI. If Perry did not enroll and participate in the Indemnity Health plan for the entire year, his tax liability would have been greater. The Indemnity Health plan saved Perry almost $400 in federal tax. In addition, Perry remembers he brought home an additional $1,500 throughout the year.

Maxie enrolled in the Indemnity Health plan in January and has participated and remained enrolled for the entire year. She is not married and earns $200,000 per year as a salary. Maxie brought home an additional $1,500 over the course of the year after enrolling in the Indemnity Health plan. Maxie 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 Maxie’s tax return, she must calculate the exact amount of indemnity benefit payments that must be reported on her tax return. Maxie must add up 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.

Maxie looks at her records and sees that she had $3,000 in out-of-pocket qualified medical expenses for the year. This consisted of $500 in co-payments to physicians, $400 for glasses, $1,700 to the hospital for certain procedures, and $400 in ambulance services. Maxie 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. Maxie 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 $200,000, Maxie will list $192,800 as wages on her personal tax return. Claiming $3,000 in indemnity benefit payments brings Maxie’s adjusted gross income (AGI) to $195,800. Maxie does not itemize her deductions and, therefore, deducts the standard deduction from her AGI. The Indemnity Health plan saved Maxie approximately $1,300 in federal tax. In addition, Maxie remembers she brought home an additional $1,500 throughout the year.