Examples 3.1
Tristan enrolled in the Indemnity Health plan in January and has participated and remained enrolled for the
entire year. He is not married and earns $80,000 per year as a salary. Tristan brought home an additional
$900
over the course of the year after enrolling in the Indemnity Health plan. Tristan 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 Tristan’s tax return, he must calculate the
exact amount of indemnity benefit payments that must be reported on his tax return. Tristan must add up all 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.
Tristan 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. Tristan 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 $80,000, Tristan will list $72,800 as wages on his personal tax
return. Claiming $6,000 in indemnity benefit payments brings Tristan’s adjusted gross income (AGI) to $78,800.
Tristan does not itemize his deductions and, therefore, deducts the standard deduction from his AGI which
further reduces his taxable income. If Tristan did not enroll and participate in the Indemnity Health plan for
the entire year, his tax liability would have been greater. In addition, Tristan remembers he brought home an
additional $900 throughout the year.
Elle enrolled in the Indemnity Health plan in January and has participated and remained enrolled for the
entire
year. She is not married and earns $80,000 per year as a salary. Elle brought home an additional $900 over
the
course of the year after enrolling in the Indemnity Health plan. Elle 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 Elle’s tax return, she must calculate the
exact amount of indemnity benefit payments that must be reported on her tax return. Elle must add up all her
out-of-pocket qualified medical expenses. 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.
Elle looks at her records and sees that she had $3,000 in out-of-pocket qualified medical expenses. This
consisted of $500 in co-payments to physicians, $400 for glasses, $1,700 to the hospital for certain procedures,
and $400 in prescriptions. Elle 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. Elle 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 $80,000, Elle will list $72,800 as wages on
her personal tax return. Claiming $3,000 in indemnity benefit payments brings her adjusted gross income (AGI) to
$75,800. She does not itemize his deductions and, therefore, deducts the standard deduction from his AGI which
further reduces her taxable income. If Elle did not enroll and participate in the Indemnity Health plan for the
entire year, her tax liability would have been greater. In addition, Elle remembers she brought home an
additional $900 throughout the year.