I’d like to invite you to join me for a minute to think long term.
Because, as I’m sure you’ve heard me preach before, your financial well-being isn’t sustained by urgent fire-dousing. It’s about big-picture strategizing.
A prime example of something to think about for your big-picture strategy right now? Your Health Savings Account.
Starting in 2026, you’ll be able to contribute more to your HSA – meaning more tax-free dollars you can sock away for future medical expenses and a bigger deduction to lower your taxable income. For self-only coverage under a high-deductible health plan, you can put in up to 4.4K, or 8.75K if you’re covering your family.
But there’s some fine print to note: to qualify as a high-deductible plan, your deductible needs to be at least 1.7K for self-only or 3.4K for family, with out-of-pocket maximums no higher than 8.5K and 17K, respectively. And if you’re working with a Health Reimbursement Arrangement (HRA) instead of an HSA, the limit’s bumping up to 2.2K for 2026.
What’s the benefit for you here? Bigger limits mean greater opportunities to lower your tax bill, IF you plan ahead. If you’re not contributing the max now, or if you’re unsure how this fits into your overall savings strategy, let’s talk through it together:
calendly.com/postalplustax
And while we’re taking stock of the big picture, April job numbers are in. U.S. hiring stayed steady last month, adding 177,000 jobs, and the unemployment rate held its ground at 4.2 percent. That’s good news.
But some sectors are tightening their belts – manufacturing cut 1K jobs in April, retail shed 1.8K, and both industries are bracing for tariffs (maybe you have a Houston friend who felt that sting). Federal employment took a notable dip, too.
So unemployment is holding steady right now, though layoffs are still happening (a “normal” event, though it’s never easy for those on the receiving end). If you find yourself in the near future needing to know what unemployment benefits really mean for your taxes – let’s talk about that so you (or those you know) can be prepared.
Postal Plus, Tax & Bookkeeping Services’s Guide to Unemployment Benefits and Taxes
“Temporary setbacks are overshadowed by persistence.” — Quentin L. Cook
You might have seen it coming or you were totally surprised, but if you’re suddenly out of a job (or you’re staring down the possibility), you’re probably dealing with a whole mix of emotions, wondering what’s next for your career, and trying to find the financial path forward.
And on top of it all … you have to figure out what this means for your taxes.
I’ve worked with a lot of Houston clients during job transitions, and let me be very clear: there is no shame in collecting unemployment benefits. But you DO need to know where unemployment benefits and taxes overlap, so you’re not blindsided by a surprise bill – or worse, penalties – when you file next spring.
A quick recap of unemployment basics…
If you’re laid off, downsized, or let go without cause (NOT if you resign voluntarily or are terminated with cause), you can apply for unemployment benefits. Your benefit amount – and how long it lasts – depends on how long you worked, how much you earned, and your state’s maximum benefit allowance.
Most states provide benefits for up to 26 weeks, and the weekly amount can vary a lot depending on your state’s formula (and whether they’re feeling generous that year). Some states also offer dependent allowances.
The silver lining
No, a sudden drop in your earnings doesn’t feel like a blessing. But tax-wise, it can lower your overall tax liability. Because if your adjusted gross income (AGI) drops, you might fall into a lower tax bracket. And that opens the door for other saving opportunities when it comes time to file your taxes, like…
The Child and Dependent Care Credit. This is a nonrefundable credit – meaning, it lowers or eliminates any taxes you owe at tax time, but it won’t get you a refund beyond the amount of tax you owe. The Child and Dependent Care Credit covers up to 35 percent of 3K in childcare expenses for one child under age 13 (or a disabled dependent), and up to 6K for two or more. (The percentage you can claim phases down with higher AGI.)
The Earned Income Tax Credit. If your total income is significantly lower this year, you might newly qualify (or qualify for a bigger amount). Now, you do need some form of earned income (wages or self-employment income) – if unemployment is your ONLY income source, you won’t qualify. But if you had some earned income earlier in the year before you were laid off, or you’re making some income from odd jobs or a local Harris County side hustle, the lower thresholds might now apply to you.
The Lifetime Learning Credit. Thinking of brushing up your skills or starting a new degree program while job searching? There’s a potential bonus there, too – up to 2K (20 percent of up to 10K in qualified education expenses) you can claim annually for certain educational expenses. (Note: this doesn’t apply to every program, so let’s talk if you’re unsure.)
The Premium Tax Credit. If you lost employer-sponsored health insurance, you may have turned to the Health Insurance Marketplace. In that case, this credit can help cover the cost of your monthly premiums. It’s based on a sliding income scale (100-400 percent of the federal poverty line), and if your income has dropped, your credit amount might increase.
The pill to swallow
Here’s where things get real with unemployment benefits and taxes: You will owe income taxes on your unemployment benefits. You should receive Form 1099-G from your state’s unemployment office in January, which reports the total benefits paid to you over the past year (and you’ll report this on your 1040).
Now, not every state taxes unemployment income – a small handful either have no income tax at all, OR specifically exempt unemployment benefits. As of now, the lucky ducks in states like California, New Jersey, Pennsylvania, and Virginia don’t get taxed on unemployment comp. Make sure to check up on your state’s rules about this.
The big issue you now need to think about? Underpayment penalties. When you’re working, your employer withholds tax from each paycheck. But with unemployment, that’s not automatic.
Yes, you can request federal withholding (using Form W-4V, if you didn’t opt in when you applied for benefits), but even then, they’ll only withhold 10 percent of each payment. And if you don’t have enough withheld – or don’t keep up with quarterly estimated tax payments – you could be looking at a penalty come April.
So, where does that leave you?
If you’re collecting unemployment, I’ve got three tax-smart suggestions:
#1: Request federal withholding using Form W-4V (again, 10 percent is the max, but it still helps lower your likelihood of penalties).
#2: Make quarterly estimated payments using Form 1040-ES. This gives you more flexibility, especially if your benefits fluctuate. And it’s especially helpful if your benefits are irregular, or if you’re earning side income.
#3: Withhold more from your paycheck when you return to work to make up for unpaid taxes earlier in the year.
All three of these options reduce your risk of owing money (and penalties) next April.
And keep in mind, the IRS safe harbor rule gives you a bit of protection here: As long as you’ve paid at least 90 percent of what you’ll owe this year, or 100 percent of what you owed last year (110 percent if your adjusted gross income (AGI) was over 150K), then the IRS won’t charge you a penalty – even if you still owe some tax when you file.
This is one of those moments where a little tax planning now can save you a lot of pain later. So if you’re feeling uncertain about your unemployment benefits and your taxes (or just want to double-check your numbers) let’s talk. You’ve got enough to worry about right now. Let’s make sure your taxes aren’t one of them:
calendly.com/postalplustax
In your corner through life’s ups and downs,
Dominic Nguyen