A few weeks ago I got a booklet in the mail from my credit card company. The booklet was sent as a reminder that I have a “credit defense” benefit on my credit card.
I pay a premium $0.39 per $100 of ending balance in my account. For that payment, I get to use a variety of benefits provided by the credit card company.
For example, if my wife or I were to get laid off or become disabled, the credit card company would make our minimum monthly payment each month for a certain period of time. Other benefits include reimbursements for medical expenses, car repair, taking the pets to the vet, and moving expenses.
I’ve never actually used any of these benefits, but I don’t mind paying the premium because I’m paranoid about sudden loss of jobs or becoming disabled.
At any rate, what are the tax consequences of these types of benefits?
I did quite a bit of research for this post, but turned up little when it comes to reimbursement of auto expenses, pet expenses and moving expenses. There is, however, guidance on the unemployment benefit part.
Let’s break this into two pieces.
One: Unemployment or Disability Payments
If you become unemployed or disabled and the credit card company makes your monthly payments for you, those payments are taxable if the payments exceed the amount of premiums you paid during the year.
This part is clear (see page 94 of IRS Publication 17).
What’s less clear is what happens if the credit card company reimburses you for things such as car repairs.
For example, under my credit card’s benefit program, they will pay up to $250 of car repairs once a year. The way it works is, I pay for the car repair using the credit card, and then the credit card company will issue me a credit on my account for up to $250. Same concept for medical expenses, pet expenses, etc.
I couldn’t find anything definitive about this, but I think this type of benefit is not taxable. Unlike with the unemployment/disability payments, these benefits are a reimbursement for expenses actually incurred.
The credit to the account does reduce the amount of credit card debt owed, but unlike in typical debt cancellation, this is not really an acquisition of wealth because it’s a reimbursement of an expense.
The only tax implication I can think of is if you’re reimbursed for a deductible expense. In that case, you would reduce your deduction by the amount paid by the credit card company.
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