Examples 7.2

Nadia enrolled in the Indemnity Health plan in January and has participated and remained enrolled for the entire year. She is married and earns $750,000 per year as a salary. Her spouse did not have any earned income for the year. Therefore, they earned a total of $750,000 per year in earned income. Nadia brought home an additional $1,900 over the course of the year after enrolling in the Indemnity Health plan. Nadia 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 Nadia’s tax return, she must calculate the exact amount of indemnity benefit payments that must be reported on her tax return. Nadia 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.

Nadia 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. Nadia 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 $750,000, Nadia will list $742,800 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 $748,800. They do not itemize their deductions and, therefore, deduct the standard deduction from their AGI. The Indemnity Health plan saved them over $400 in federal tax. In addition, Nadia remembers she brought home an additional $1,900 throughout the year.

Theo enrolled in the Indemnity Health plan in January and has participated and remained enrolled for the entire year. He is married and earns $750,000 per year as a salary. His spouse did not have any earned income for the year. Therefore, they earned a total of $750,000 per year in earned income. Theo brought home an additional $1,900 over the course of the year after enrolling in the Indemnity Health plan. Theo 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 Theo’s tax return, he must calculate the exact amount of indemnity benefit payments that must be reported on his tax return. Theo 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.

Theo 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. Theo 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. Theo 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 $750,000, Theo will list $742,800 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 $745,800. They do not itemize their deductions and, therefore, deduct the $25,100 standard deduction from their AGI. This brings their taxable income for the year to $720,700. Because they are in the 37% tax bracket, their tax liability is $203,182. If Theo did not enroll and participate in the Indemnity Health plan for the entire year, their tax liability would have been $204,736. The Indemnity Health plan saved them $1,554 in federal tax. In addition, Theo remembers he brought home an additional $1,900 throughout the year.