Examples 1.2
Diane enrolled in the health plan for the entire year. She is married and earns $20,000 per year as a
salary.
Together, she and her spouse, have W-2 and 1099 income of $5,600.00. Diane brought home an additional $300
over
the course of the year after enrolling in the indemnity plan. Diane is wondering how much their tax
liability
will increase this year because she received $12,000 in indemnity benefit payments.
In order to determine how the indemnity benefit payments will affect Diane’s tax return, she must calculate the
exact amount of indemnity benefit payments that must be reported on her tax return. Diane must add up all her,
her spouse’s, and any dependents’ out-of-pocket qualified medical expenses paid. 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.
Diane 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, $12,000, on Schedule 1,
line 8 of their personal tax return. Diane also notices that her W-2 reflects a lower amount for gross because
the health plan’s premium payments ($1,200 per month) are paid through a Section 125 cafeteria plan salary
reduction. Therefore, instead of $20,000, Diane will list $5,600 as her wages on their personal tax return.
Claiming $12,000 in indemnity benefit payments brings their adjusted gross income (AGI) on their joint tax
return to $17,600. They do not itemize their deductions and, therefore, deduct the standard deduction from their
AGI. This brings their taxable income for the year to almost zero. If Diane did not enroll and participate in
the health plan for the entire year, their tax liability would have been higher.
Martin enrolled in the indemnity plan in January and has participated and remained enrolled for the entire
year.
He is married and earns $20,000 per year as a salary. His spouse earns $2,000 per year as a salary.
Together,
they earn a total of $22,000 per year in earned income. Martin brought home an additional $300 over the
course
of the year after enrolling in the indemnity plan. Martin is wondering how much their tax liability will
increase this year because he received $12,000 in indemnity benefit payments.
In order to determine how the indemnity benefit payments will affect Martin’s tax return, he must calculate the
exact amount of indemnity benefit payments that must be reported on his tax return. Martin must add up all his,
his spouse’s, and any dependents’ out-of-pocket qualified medical expenses paid throughout the year. 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.
Martin looks at his records and sees that they had $6,000 in out-of-pocket qualified medical expenses for the
year. This consisted of $2,700 in co-payments to physicians, $300 prescriptions, $1,500 to the hospital for
certain procedures, and $1,500 in treatment expenses. Martin will deduct the $6,000 in qualified out-of-pocket
medical expenses from the $12,000 in indemnity benefit payments he received. As such, they will report $6,000 of
indemnity benefit payments for the year on Schedule 1, line 8 of their personal tax return. Martin also notices
that his W-2 reflects a lower amount for gross because the Indemnity Health plan’s premium payments ($1,200 per
month) are paid through a Section 125 cafeteria plan salary reduction. Therefore, instead of $20,000, Martin
will list $5,600 as his 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 $13,600. They do not itemize their deductions
and, therefore, deduct the standard deduction from their AGI.