What Are Out-of-Pocket Expenses?

What Are Out-of-Pocket Expenses?

Let me explain out-of-pocket expenses directly: these are costs you pay from your own pocket, and they might or might not get reimbursed later. You often hear this term in the context of work-related spending where your employer pays you back, or in health insurance where it covers your share of medical bills like deductibles, copays, and coinsurance.

Key Takeaways

An out-of-pocket expense is simply a payment you make with your own money, and your employer might reimburse it later. For work-related ones, your company usually covers them. In health insurance, these are your portion of medical costs, including deductibles, copays, and coinsurance. Health plans have out-of-pocket maximums set by law to cap what you pay yearly for covered care. Some of these expenses can be deducted from your taxes, but they need to be a significant portion of your income to beat the standard deduction.

Understanding Out-of-Pocket Expenses

As an employee, you might spend your own money on business needs, especially when traveling for work, and your employer reimburses these through an approved process. Think of common examples like airfare, car rentals, taxis or rideshares, gas, tolls, parking, lodging, meals, and work supplies or tools.

In health insurance, out-of-pocket means the part of medical costs not covered by your plan, such as deductibles, copays, and coinsurance. Plans have out-of-pocket maximums mandated by federal law, which limit your annual spending on healthcare. The Affordable Care Act sets guidelines for these maximums in group and individual plans.

For 2024, Marketplace plans cap out-of-pocket at $9,450 for individuals and $18,900 for families, dropping to $9,200 and $18,400 in 2025. Plans can't exceed these, but many have lower limits.

Out-of-Pocket Maximums vs. Deductibles

In health insurance, your deductible is what you pay yearly for covered services before insurance starts contributing. Once met, you share costs via coinsurance—for instance, in an 80/20 plan, you pay 20% and the plan covers 80%.

Your coinsurance, copays, and deductible all count toward the out-of-pocket maximum. Hit that maximum, and the plan covers 100% of covered costs for the year.

Plans vary: lower premiums often mean higher deductibles, and vice versa. If you expect few medical needs, a high-deductible plan minimizes premiums since you might not reach the deductible. For high expenses, choose lower deductibles with higher premiums to get coverage sooner.

High-Deductible Health Plans (HDHPs)

A high-deductible health plan can cut your costs with lower premiums and tax breaks via a health savings account. For 2024, IRS defines an HDHP as having at least $1,600 deductible for individuals or $3,200 for families, rising to $1,650 and $3,300 in 2025.

Out-of-pocket caps for HDHPs are $8,050 individual and $16,100 family in 2024, increasing to $8,300 and $16,600 in 2025. These plans cover preventive services fully from in-network providers before the deductible.

If you anticipate low medical costs, an HDHP makes sense to keep premiums down. For higher needs, opt for lower deductibles. HDHPs let you use an HSA, paying medical expenses with pretax dollars—for example, someone in the 24% tax bracket saves on $3,000 in costs.

HSA contribution limits for 2024 are $4,150 individual and $8,300 family, with catch-up options, rising to $4,300 and $8,550 in 2025.

Tip for Choosing Plans

When picking a plan, estimate your yearly medical expenses and compare premiums, deductibles, and out-of-pocket maximums across options.

Examples of Out-of-Pocket Expenses

Take a work example: you spend $250 on airfare, $50 on rides, $100 on a hotel, and $100 on meals for a client meeting, totaling $500 from your card. Submit the report, and your employer reimburses you.

For health, prescriptions are a common out-of-pocket cost. You pay full price until your deductible is met, though some plans discount generics anytime. Plans might combine medical and prescription deductibles.

Say you have a $2,500 combined deductible and you've paid $2,350 already; a $150 prescription costs you $150 out-of-pocket, meeting the deductible. After that, you might still pay copays like $10 per generic refill.

Out-of-Pocket Expenses and Tax Returns

You can deduct some out-of-pocket expenses on taxes, like charitable donations or unreimbursed medical costs. Since the 2017 Tax Cuts and Jobs Act, unreimbursed business expenses aren't deductible anymore. These deductions lower your tax bill indirectly.

Homebuying Out-of-Pocket Expenses

In real estate, these are costs beyond the mortgage during buying, varying by location, including home inspections, appraisals, escrow deposits, closing costs like loan fees, attorney fees, and property taxes.

Moving and Relocation Expenses

Moving costs from job relocation were deductible, but the TCJA ended that for 2018-2025 except for active-duty military under orders. Military members use IRS Form 3903 for deductions on packing, hauling, storage, and insurance, but not if the government covers them.

What Does Out-of-Pocket Mean?

It means paying with your own money, reimbursed or not, like a reimbursed flight or health costs before deductible.

What Is the Difference Between a Deductible and an Out-of-Pocket Expense?

Both relate to when insurance pays, but deductible is your initial yearly payment before coverage starts, while out-of-pocket limit is the max you pay total, including deductible, coinsurance, and copays. Limits are $8,050 individual and $16,100 family for 2024, rising to $8,300 and $16,600 in 2025.

What Is Not an Example of an Out-of-Pocket Expense?

Your monthly health premium doesn't count; out-of-pocket includes deductibles, coinsurance, copays for covered services, and all non-covered costs.

Is It Better to Pay Out-of-Pocket or Use Health Insurance?

A high-deductible plan with lower premiums might tempt you to pay routine care out-of-pocket, but it risks high costs if unexpected needs arise.

The Bottom Line

When selecting a health plan, estimate your annual costs to decide between low-deductible high-premium or high-deductible low-premium options. Remember, your needs change with age, family, and income, affecting affordable out-of-pocket levels.