Examples 5.2

Hanna enrolled in the Indemnity Health plan in January and has participated and remained enrolled for the entire year. She is married and earns $225,000 per year as a salary. Her spouse earns $175,000 per year as a salary. Together, they earn a total of $400,000 per year in earned income. Hanna brought home an additional $1,500 over the course of the year after enrolling in the Indemnity Health plan. Hanna is wondering how much their 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 Hanna’s tax return, she must calculate the exact amount of indemnity benefit payments that must be reported on her tax return. Hanna must add up 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.

Hanna 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, $6,000, on Schedule 1, line 8 of their personal tax return. Hanna 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 $225,000, Hanna will list $217,800 as her wages on their personal tax return. Claiming $6,000 in indemnity benefit payments brings their adjusted gross income (AGI) on their joint tax return to $398,800. They do not itemize their deductions and instead deduct the standard deduction from their The Indemnity Health plan saved them almost $400 in federal tax. In addition, Hanna remembers she brought home an additional $1,500 throughout the year.

Dave enrolled in the Indemnity Health plan in January and has participated and remained enrolled for the entire year. He is married and earns $225,000 per year as a salary. His spouse earns $175,000 per year as a salary. Together, they earn a total of $400,000 per year in earned income. Dave brought home an additional $1,500 over the course of the year after enrolling in the Indemnity Health plan. Dave is wondering how much their 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 Dave’s tax return, he must calculate the exact amount of indemnity benefit payments that must be reported on his tax return. Dave must add up 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.

Dave looks at his records and sees that they had $3,000 in out-of-pocket qualified medical expenses for the year. This consisted of $500 in co-payments to physicians, $400 for prescriptions, $1,700 to the hospital for certain procedures, and $400 in ambulance services. Dave will deduct the $3,000 in qualified out-of-pocket medical expenses from the $6,000 in indemnity benefit payments he received. As such, they will report $3,000 of indemnity benefit payments for the year on Schedule 1, line 8 of their personal tax return. Dave also notices that his 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 $225,000, Dave will list $217,800 as his wages on their personal tax return. Claiming $3,000 in indemnity benefit payments brings their adjusted gross income (AGI) on their joint tax return to $395,800. They do not itemize their deductions and instead employ the standard deduction from their AGI. The Indemnity Health plan saved them approximately $1,300 in federal tax. In addition, Dave remembers he brought home an additional $1,500 throughout the year.