How are benefit payments from individually-owned medical expense policies treated for tax purposes?

• A. Exempt from income taxes
• B. Taxed as ordinary income
• C. Taxed as a dividend
• D. Tax credit given for amount of benefit payment

Answer: (A)

Payments from individually owned medical expense policies are tax-free because they are reimbursements for medical care, not income. When you incur medical expenses and the policy pays out to cover those costs, the money isn’t considered earnings or a gain—it's simply returning money you spent on health care. As long as the funds are used for qualified medical expenses, they don’t count as taxable income. (If a payout somehow exceeded your actual medical costs, the excess could become taxable, but that’s not the usual case.)