We've all been there - those little extra costs that creep up in our day-to-day lives and our wallets just can’t seem to escape them. Known as out-of-pocket expenses, these are costs that we as individuals are required to pay, whether they come from business-related matters like travel or nonrefundable medical expenses like insurance deductibles or copays.
It’s a familiar tale for many workers. You cover the costs of business travel, submitting the receipts for airfare, hotel stays, meals or car rentals hoping for reimbursement. That $500 travel expense you fronted for a client meeting? You're counted on your employer to pay it back.
But out-of-pocket expenses aren't just related to the workplace. Those of us navigating the world of healthcare insurance are no strangers to them either. We're talking about copays, coinsurance, and insurance deductibles that don't get covered by your health insurance. There's a federally set limit on these expenses, dictated by the Affordable Care Act (ACA), for both individual and family healthcare plans that gets updated annually.
So, what's your bill looking like for 2022? If you're opting for individual coverage, you're looking at an out-of-pocket limit of $8,700. For families, the limit is $17,400. And for 2023, anticipate an increase to $9,100 and $18,200 respectively for individuals and families.
Then there's the matter of insurance deductibles. This is the amount you pay for covered medical costs before your insurance steps in. Once that's taken care of, you share costs with your insurance plan. Opt for an 80/20 plan, and your share is 20% while your plan covers the remaining 80%.
Your deductible, copays and coinsurances all count towards your annual out-of-pocket maximum. Once that's reached, the plan pays for 100% of your covered medical costs for the rest of the year. Typically, the lower your premium, the higher your deductible, and vice-versa.
High Deductible Health Plans (HDHP) can offer a pocket-friendly alternative through lower monthly premiums and potential tax breaks. According to the Internal Revenue Service (IRS), an HDHP for 2022 is a health insurance plan with a deductible of at least $1,400 for individuals or $2,800 for families.
Consider prescription medications as examples of out-of-pocket health expenses. Until you've met your deductible, you're paying out-of-pocket for any medication prescribed to you. Some plans however, offer discounts on generic drugs whether you've met your deductible or not.
Out-of-pocket expenses also find their way in the real estate industry signifying costs incurred during the property buying process that go over and above the mortgage. Think home inspections, escrow account deposits, and legal fees.
There are possibilities for deductions from personal income taxes for out-of-pocket expenses like charitable donations and unreimbursed medical expenses. However, since the Tax Cut and Jobs Act (TCJA) passed in 2017, unreimbursed business expenses no longer qualify for deductions.
TL;DR? Out-of-pocket expenses are unavoidable, but understanding them can equip you better to manage your budget effectively. Whether it's an office trip or a doctor's visit or even purchasing a house, make sure you're mindful of what's coming out of your pocket.