Examples 1.1
After calculating all Taxable Income, per year as a salary, Jeff has a total of $10,500 on his W-2. He also
received indemnity benefits of $600 per month, for a total of $7,200 in benefits. This year, Jeff actually
received an additional $200 more than last year total. How does Jeff calculate his tax liability with the
additional indemnity benefits?
Jeff must calculate the total amount of indemnity benefit payments that must be reported on his tax return. Jeff
can then also add up all of his out-of-pocket qualified medical expenses by looking at his credit card and bank
records. Once he knows the amount of his out-of-pocket qualified medical expenses, he will deduct this amount
from the indemnity benefit payments he received.
Jeff cannot find any qualified medical expenses, so he will report the entire amount of indemnity benefit
payments for the year, $7,200, on Schedule 1, line 8 of his personal tax return. Jeff noticed that his W-2 was
lower than last year. This was because the premiums for the hospital indemnity insurance were paid through a
Section 125 cafeteria plan with pre-tax reductions. By adding the premium payments, Jeff’s adjusted gross income
(AGI) is $17,700. Jeff does not itemize his deductions and, therefore, deducts the $13,850 standard deduction
from his AGI. This brings Jeff’s taxable income for the year to $3,850. Because he is in the 10% tax bracket,
his tax liability is $385. If Jeff did not enroll and participate in the plan for the year, his W-2 would have
included his premium payments (approximately $900) and tax liability would have been $745. The Indemnity Health
plan saved Jeff about $360 in federal tax. In addition, Jeff remembers he brought home an additional $200
throughout the year.
Tracy enrolled in the Indemnity Health plan in January and has participated and remained enrolled for the
entire
year. She has a total of $10,500 on her W-2 (instead of $21,300 which was her salary last year). She also
received indemnity benefits of $600 per month, for a total of $7,200 in benefits. Tracy did track all of her
expenses and wants to know how to deduct them from her taxes?
Tracy 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 for an ambulance ride, $400 for hospital stay, $1,700 to the hospital for certain
procedures, and $400 in physician expense. Tracy will deduct the $3,000 in qualified out-of-pocket medical
expenses from the $7,200 in indemnity benefit payments she receives. As such, she will report $4,200 of
indemnity benefit payments for the year on Schedule 1, line 8 of her personal tax return. Tracy also notices
that her W-2 reflects a lower amount for gross because the plan’s premium payments are paid through a Section
125 cafeteria plan salary reduction. Therefore, instead of $21,300, Tracy will list $10,500 as wages on her
personal tax return. Claiming $4,200 in indemnity benefit payments brings Tracy’s adjusted gross income (AGI) to
$14,700. Tracy does not itemize her deductions and, therefore, deducts the standard deduction from her AGI. This
puts Tracy’s federal tax obligation at approximately $100 for the year and saves her approximately $750 in
federal taxes.