Examples 7.1

Dale enrolled in the Indemnity Health plan in January and has participated and remained enrolled for the entire year. He is not married and earns $600,000 per year as a salary. Dale brought home an additional $1,800 over the course of the year after enrolling in the Indemnity Health plan. Dale 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 Dale’s tax return, he must calculate the exact amount of indemnity benefit payments that must be reported on his tax return. Dale 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.

Dale 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. Dale 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 $600,000, Dale will list $592,800 as wages on his personal tax return. Claiming $6,000 in indemnity benefit payments brings Dale’s adjusted gross income (AGI) to $598,800. Dale does not itemize his deductions but deducts standard deduction from his AGI. The Indemnity Health plan saved Dale almost $400 in federal tax. In addition, Dale remembers he brought home an additional $1,800 throughout the year.

Cole enrolled in the Indemnity Health plan in January and has participated and remained enrolled for the entire year. He is not married and earns $750,000 per year as a salary. Cole brought home an additional $1,800 over the course of the year after enrolling in the Indemnity Health plan. Cole 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 Cole’s tax return, he must calculate the exact amount of indemnity benefit payments that must be reported on his tax return. Cole 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.

Cole looks at his records and sees that he had $6,500 in out-of-pocket qualified medical expenses for the year. 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. Cole 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. Cole 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 $750,000, Cole will list $742,800 as wages on his personal tax return. Cole’s adjusted gross income (AGI) is $742,800. Cole does not itemize his deductions but deducts standard deduction from his AGI. The Indemnity Health plan saved Cole over $2,600 in federal tax. In addition, Cole remembers he brought home an additional $1,800 throughout the year.