Examples 6.1

Oliver enrolled in the Indemnity Health plan in January and has participated and remained enrolled for the entire year. He is not married and earns $350,000 per year as a salary. Oliver brought home an additional $1,400 over the course of the year after enrolling in the Indemnity Health plan. Oliver 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 Oliver’s tax return, he must calculate the exact amount of indemnity benefit payments that must be reported on his tax return. Oliver 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.

Oliver 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. Oliver 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 $350,000, Oliver will list $342,800 as wages on his personal tax return. Claiming $6,000 in indemnity benefit payments brings Oliver’s adjusted gross income (AGI) to $348,800. Oliver does not itemize his deductions but deducts standard deduction from his AGI. The Indemnity Health plan saved Oliver approximately $400 in federal tax. In addition, Oliver remembers he brought home an additional $1,400 throughout the year.

Latisha enrolled in the Indemnity Health plan in January and has participated and remained enrolled for the entire year. She is not married and earns $350,000 per year as a salary. Latisha brought home an additional $1,400 over the course of the year after enrolling in the Indemnity Health plan. Latisha 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 Latisha’s tax return, she must calculate the exact amount of indemnity benefit payments that must be reported on her tax return. Latisha must add up her out-of-pocket qualified medical. 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.

Latisha 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 prescriptions, $1,700 to the hospital for certain procedures, and $400 in ambulance services. Latisha 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. Latisha 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 $350,000, Latisha will list $342,800 as wages on her personal tax return. Claiming $3,000 in indemnity benefit payments brings Latisha’s adjusted gross income (AGI) to $345,800. Latisha does not itemize her deductions but deducts standard deduction from her AGI. The Indemnity Health plan saved Latisha over $1,400 in federal tax. In addition, Latisha remembers she brought home an additional $1,400 throughout the year.

Fred enrolled in the Indemnity Health plan in January and has participated and remained enrolled for the entire year. He is not married and earns $350,000 per year as a salary. Fred brought home an additional $1,400 over the course of the year after enrolling in the Indemnity Health plan. Fred 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 Fred’s tax return, he must calculate the exact amount of indemnity benefit payments that must be reported on his tax return. Fred 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.

Fred looks at his records and sees that he had $6,500 in out-of-pocket qualified medical expenses. 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. Fred 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. Fred 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 $350,000, Fred will list $342,800 as wages on his personal tax return. Fred’s adjusted gross income (AGI) is $342,800. Fred does not itemize his deductions but utilizes the standard deduction from his AGI. The Indemnity Health plan saved Fred approximately $2,500 in federal tax. In addition, Fred remembers he brought home an additional $1,400 throughout the year.