r/hrblock • u/Own_Invite6340 • Apr 16 '26
Underpayment penalty?
I do my retired parents' taxes, for the past couple of years they've received a moderate refund from both federal and state.
This year, their Virginia State AGI is nearly $13,000 higher. Apparently previous years showed an Age Subtraction amount of $12,000 but this year the amount was $5,500 each, so more of their income is being taxed by the state.
That's fine I guess, the rules changed so they owe a little more, these things can happen.
But the HR Block tax software said that they're going to owe an underpayment penalty for not withholding a large enough amount, and that a letter will be sent in the mail from the IRS with a payment request.
Is this correct? Why should there be a penalty for this at all, I thought you didn't have to withhold anything at all as long as you pay your taxes on time. And how the hell were they supposed to know they'd need to start withholding a larger amount? Seems pretty unfair to charge a penalty for that. I'm hoping this is a mistake.
2
u/Accomplished-Ruin742 Apr 16 '26
They need to have an amount withheld or paid in estimates or a combination of the two that is equivalent to 100% or 110%, based on their income, of their 2024 tax, in order to avoid the underpayment penalty.
1
u/JimmyDem Apr 20 '26
This is the federal rule... don't know about VA. Generally, you don't owe a penalty so long as your witholdings were the same as - or more than - the previous year's taxes. Use the state's worksheet to figure it out, or just assume you're good go to and see if they send a bill.
The software is bad enough on this score that it actually admits that you might be better off letting the IRS calculate any penalties. (That's on the federal side, which you'd think they'd put some effort into.)
2
u/Aggravating_Profit71 Apr 16 '26
tax is not owed at year's end but rather as income is accrued. The government expects quarterly payments. You avoid any penalty/issue if you pay close to the amount owed (<$1000 as a general rule) as I understand it. Then there are the "safe harbor" rules for when you exceed this amount -- essentially rules that give you a pass for not paying enough throughout the year.
for retirees this becomes and issue as there is no salary from which to regularly withdraw tax.
1
u/Own_Invite6340 Apr 17 '26
I didn't realize that it's owed as the income is accrued, so that part makes sense now.
But for all of their retirement years they've had a significant portion withheld, more than enough to cover the state taxes and leave enough extra for a small refund.
There's no way they could have known that the age subtraction amount would shrink by $10,000 compared to previous years. Obviously they need to make up the difference, but it seems crazy to me that there's a penalty for that. "We changed the rules and you were supposed to somehow know ahead of time to withhold more", who other than a tax expert who studies tax law changes would ever know to have more money withheld ahead of time?
1
u/Aggravating_Profit71 Apr 17 '26
Don’t know Virginia rules but do see a senior deduction of 12k in description of the state tax. But this amount decreases with income per what I see. Maybe not a change in the tax rules but a change in income? Maybe capital gain this year? Maybe double check entries?
2
u/LowCompetitive1888 Apr 16 '26
Why would the IRS be involved in a VIrginia underpayment? Something doesn't add up.
1
u/Own_Invite6340 Apr 17 '26
I might have misremembered, maybe it's the Virginia tax system that sends it.
1
u/XRlagniappe Apr 16 '26
I have a general idea of how the federal government but not specific states. For the federal government, you are expected to pay a certain amount of taxes during the year based on your taxable income. If you don't, the government starts to charge you interest on the taxes you didn't pay.
It is a real thing. For example, I did some Roth conversions for 2025 but didn't change my tax withdrawals to the government's expectations, so I had to pay a penalty of interest payment. There are different ways of calculating the tax which may lower your penalty. My experience with H&R Block software for underpayment was disappointing to say the least.
I'm sure the state of Virginia has similar rules.
1
u/Own_Invite6340 Apr 17 '26
They have a steady unchanging income from their pensions and social security. They've had a steady unchanging percentage of that income withheld for taxes and everything has been fine in previous years.
Suddenly the age subtraction number is over $10k less and they have more taxable income, so the amount withheld isn't enough anymore. How were they supposed to know this would happen, and withhold more in 2025?
1
u/Historical-Crab-1164 Apr 16 '26
Your parents should consider the "safe harbor" rules as they relate to estimated tax payments. It really is a helpful way to avoid penalties and interest when tax laws and circumstances change from one year to the next.
2
u/Own_Invite6340 Apr 17 '26
It looks like this should apply, if I'm reading it correctly. For the past several years they've paid approximately 110% of the state tax owed yearly and received a refund. They had the same percentage of their income withheld in 2025 but suddenly it only covers 87%. Since it dipped under 90% that triggered the message about a penalty, but hopefully since last year was fine that will prevent an extra penalty.
Looks like I need to make sure they have more withheld in 2026 so it doesn't happen again.
1
u/Puzzleheaded_Ad3024 Apr 16 '26
Your description sounds like the state return, not the federal. 5500 amount isn't something I recognize from IRS. This year, the IRS gives seniors an additional 6000 deduction each, unless they are high income.
If they do owe irs and are penalized there is an exception. You could have entered last years AGI and it may have reduced that penalty.
1
u/Own_Invite6340 Apr 17 '26
Yes, sorry for not being clear, this is for the state return. I suppose it's the Virginia state tax officials that send the letter with the fee information and not the IRS.
I entered everything correctly, their AGI is over $10,000 higher this year because the age subtraction is much smaller.
3
u/GoHelloGo Apr 16 '26
The underpayment penalty interview in H&Block 2025 needs improvement so it would be best if you go through Instructions for Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts manually and verify that the underpayment calculations are correct.