What are out of Pocket Expenses?

Mary McMahon

Out of pocket expenses are costs that arise in the course of conducting business or personal matters requiring immediate payments in cash, putting a person literally “out of pocket” to cover those expenses. Some of these expenses may be tax-deductible, if they fall into certain categories, and others may be eligible for reimbursement, allowing people to be compensated for the unexpected outlay of cash. Receipts need to be kept in both cases to carefully document the expenses.

Repairs for damage that is not covered under an auto insurance policy is an example of an out of pocket expense.
Repairs for damage that is not covered under an auto insurance policy is an example of an out of pocket expense.

Employees conducting business on behalf of an employer may have out of pocket expenses like bridge tolls, lunch for a client, supplies to complete a task, and so forth. As long as the activities of the employee were specifically requested and approved by the employer, the employer may offer reimbursement. In other cases, employees can claim those expenses on a tax return, as they are associated with the cost of handling tasks assigned at work.

Some prescriptions may not be paid for by health insurance, making this expense an out of pocket cost.
Some prescriptions may not be paid for by health insurance, making this expense an out of pocket cost.

Employers with trusted personnel may have other methods of handling out of pocket expenses, such as issuing credit cards or blank checks, or allowing employees to charge expenses to a company account. In other cases, employees must submit documentation of expenses incurred while performing work on behalf of the company so they can be reviewed. If approved, a check will be issued to compensate, or employees will be paid out of a petty cash fund.

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Health insurance copays for doctor visits are considered out of pocket expenses.
Health insurance copays for doctor visits are considered out of pocket expenses.

Personal out of pocket expenses are sometimes deductible. Out of pocket medical expenses, coverage for costs not addressed by insurance plans, may be deductible. If they are high, they are usually higher than the standard deduction, creating an incentive to itemize on a tax return. Donations to charities are also considered a form of out of pocket expense, as the person is providing cash payments up front.

Over-the-counter medications are typically considered out of pocket expenses.
Over-the-counter medications are typically considered out of pocket expenses.

Payments for goods and services used over a period of time do not qualify. Thus, gas and tolls are out of pocket expenses, but car insurance and registration are not. People using cars for company business can, however, claim mileage to compensate them for wear and tear on the car, along with indirect expenses like insurance. Likewise, health insurance premiums are not out of pocket expenses, but copays at doctor visits would be. Usually, it is easy to determine if an expense qualifies as an out of pocket cost; if it is for a service or good used immediately, rather than an investment in a long term service, it is generally an out of pocket expense.

Out of pocket expenses require immediate payments in cash for a necessary service.
Out of pocket expenses require immediate payments in cash for a necessary service.

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