What are Out-Of-Pocket Expenses?

Out-of-pocket expenses refer to costs that individuals pay out of their own cash reserves. The widely used phrase applies to the costs required to maintain a fixed asset, costs incurred by an insurance holder when he receives medical care, work-related and business expenses that are later reimbursed by an employer, and personal expenses in several other categories.

Understanding Out-Of-Pocket Expenses

Common examples of out-of-pocket expenses include gasoline for a car, repairing an old building, taking a business client to lunch, and certain medical payments such as prescription costs. For example, if one purchases a car and later pays to have it repaired and filled with gas, the repairs and the gas are both out-of-pocket expenses, as they are costs above and beyond the cost of purchasing the car that the car owner has to pay out of his personal budget. The purpose of out-of-pocket expenses varies based on the category under discussion.

Key Takeaways

  • Out-of-pocket expense is an umbrella term for payments you make with your own money even though it may be later reimbursed.
  • In terms of health care, the out-of-pocket expenses are used by insurers to encourage cost consciousness in the insured.
  • Out-of-pocket expenses incurred for work purposes are usually reimbursed by the company, but the actual process varies between businesses.

Out-of-Pocket in Health Care and Insurance

In the health care and insurance industries, out-of-pocket expenses refer to the portion of the bill that the insurance company does not cover and that the individual must pay on his own. Out-of-pocket health care expenses are not the same as deductibles. Instead, it is an umbrella term that refers to deductibles, co-pays, and co-insurance. Arguably, out-of-pocket expenses force the insurance holder to carefully consider whether or not he truly needs medical care. By making the individual partly responsible for his own bill, it reduces the chances that he is likely to use his insurance coverage frivolously.

For example, if someone has a $10,000 deductible, that deducible is the amount of his out-of-pocket expenses. The insurance does not cover his medical bills until that amount has been reached or paid by the insured. Any amount in excess of $10,000 will be covered by the insurer. Similarly, if a person has to pay a $10 co-pay every time he sees a doctor, the total of those co-pays is his out-of-pocket expenses.

Out-of-Pocket Costs While Buying a Home

In the real estate industry, out-of-pocket expenses refer to any expenses above and beyond the mortgage itself that the buyer incurs through the sales process. These costs vary depending on the property and real estate laws in the area, but they typically include the cost of a home inspection, appraisal fees and escrow account deposits. They also include closing costs, which can include loan origination fees, attorney fees and property taxes.

Out-of-Pocket Expenses at Work

Companies have a variety of processes for dealing with out-of-expenses incurred while working. These expenses can be as simple as taxi costs while on a business trip or covering a client's lunch bill when discussing business. Some companies advance employees the projected out-of-pocket expenses and may even allow them to keep the difference if they are able to save some money. Other companies will reimburse employees on receipted out-of-pocket expenses after they have been incurred. Depending on the expense policy and the category of expense, employees may have to keep an expense journal tracking mileage on a personal vehicle, for example. This type of out-of-pocket expense is also referred to as reimbursable out-of-pocket costs.

Out-of-Pocket Expenses and Tax Returns

Some out-of-pocket expenses can be deducted from one's personal income taxes. Income tax deductions are often available for expenses related to business, education, health care, and charitable donations. While tax deductions don't represent a direct reimbursement, there is an ancillary benefit, as claiming these expenses as a deduction can reduce one's tax burden.