How do I deduct unreimbursed medical costs from the 1099 MISC income from my fixed indemnity health plan (a.k.a Aflac)?

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Per Office of Chief Counsel Internal Revenue Service Memorandum, Number: 201719025, Release Date: 5/12/2017, PRESP-104172-17: if a fixed indemnity health plan with premiums paid on a pre-tax basis through a section 125 cafeteria plan paid $200 for a medical office visit and the covered individual’s unreimbursed medical costs as the result of the visit were $30, $30 would be excluded from gross income under section 105(b) and the excess amount of $170 would be included in gross income.

Aflac sent a 1099 MISC with income in Box 3 but per the memo above, I have offsetting unreiumbursed medical expenses that can offset this "income" in Box 3.  How do I enter these offestting unreimbursed medical expenses per the IRS memo above?  Thank you

[AmyC · Accepted solution]

There are exceptions to the rule listed below. In this IRS memorandum there is better clarification for what is taxable and when. Finally, AFLAC clarifies what they meant here. I believe you are saying that you received a 1099-MISC to cover your medical expenses for an event; but, it is greater than what you actually spent so you have taxable income. 

If you truly qualify to reduce your income, the easiest way to subtract those additional expenses from your income would be to follow these steps:

Enter the 1099-MISC income

Subtract the nontaxable portion

1. go to the federal income section
2. scroll to the bottom
3. Miscellaneous Income, 1099-A, 1099-C, Start
4. Other income not already reported on a W2 or 1099, Start
5. Other wages? Yes
6. Household employee? Continue
7. Sick pay, continue, Medicaid, continue
8. Other Earned Income? Select Yes, continue
9. Source of income? Select Other
10. Enter description - 1099MISC nontaxable per memo 201719025

11. Amount, enter a negative value of the exempt expenses

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Hello, and to AmyC., thank you sooooo much for the innovative and throughtful soluiton to my Aflac 1099 MISC income offset question.  I have been a user of TaxAct for years and they could not provide me a solution for this situation, so thank you for your efforts and I will be using TurboTax going forward based on your expertise and prompt support.

That said, I have a follow up question. Due to following the instructions you provided, I now have a "less than zero" number in my "other earned income" section.  As I progress to efile, the online software is not allowing me to efile because of this less than zero other earned income.  It says I can print and file by mail, which is acceptable, but are you aware of any way I can utilize your solution for entering my unreimbursed medical expenses to offset my 1099MISC Aflac "income" in Box 3 and still efile?

Also, since we are really in the weeds together, I thought it was appropriate to enter my ~$8k in fixed indemnity payments from Aflac as "Medical Reimbursements" in the "Deductions & Credits" section in the "Medical Expenses" category. Obviously, this reduces (almost eliminates) any deduction I get for my medical expenses this year but I thought better safe than sorry when considering these Aflac fixed indemnity payments as "Medical Reimbursements".  I could increase my refund by not recognizing these Aflac payments as "Medical Reimbursements" in the "Medical Expenses" section of the "Deductions & Credits" section.  What does TurboTax think, are fixed indemnity payments such as from Aflac "Medical Reimbursements" for the purpose of calculating Medical Expense deductions?

Thank you sooooo much for your thoughts on these two questions (efile and Med Expense deduction).  Steven

[AmyC · Accepted solution]

Let me start with the easy one. An indemnity is not a reimbursement but you are required to separate out the payments you made vs the payment you received. Only medical bills above the indemnity would be included or you can claim it all and subtract out the indemnity as a reimbursement in the program. The final total goes on Sch A with medical bills and as long as that number is correct, the method to arrive is moot.

You can't double dip and claim the same medical expenses in more than one place. I suggest you maximize by claiming what you can as a negative adjustment. Let's move the adjustment from the other income not on w2 or 1099 to other reportable income instead. This should allow the negative income.

Subtract your expenses
1. Miscellaneous Income, 1099-A, 1099-C, Start
2. Scroll to the bottom
3. Other reportable income, Start
4. Other taxable income?
5. Select YES
6. Description  
7. Amount, enter your negative amount

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You are the best Amy C.!  Thank you again so much for the quick response and thoughtful solution.  I can confrim that by following your instructions I am now able to efile and all is right with the world. 

I wish you and yours the very best, your new long time TurboTax customer, Steven.