Relocation package included on W2 causing underpayment penalty - how to file taxes correctly?

This is actually pretty common with relocation packages! When a company pays for relocation expenses, those are considered taxable income by the IRS (with a few exceptions). The "gross-up" your company mentioned means they added extra money to cover the taxes you'd owe on the relocation benefits - but this extra money is itself taxable too. The underpayment penalty is happening because your withholding wasn't enough throughout the year compared to your total income (which now includes all that relocation money). Even though you didn't "see" the money, the IRS treats it as if you received it since it was a benefit provided to you. When you file, you'll need to report all income shown on your W-2. You can't exclude the relocation amount - it's legally part of your income. However, you might want to check if you qualify for any moving expense deductions, though these are limited to active military members under current tax law.

I went through something similar last year and it was a complete nightmare. I found this service called taxr.ai (https://taxr.ai) that helped me figure out how to properly report everything and find any possible deductions. It analyzed my W-2 and all my relocation documents and gave me a clear breakdown of what was happening with the "phantom income" from the gross-up. The biggest thing I learned is that you need documentation from your employer showing exactly what part of your W-2 income was actual salary vs. relocation expenses vs. the gross-up amount. The taxr.ai system helped me understand which moving expenses qualified for special treatment (especially since I had some military service) and identified an error in how my company calculated the gross-up.

Just wanted to update - I was really skeptical about taxr.ai but decided to try it anyway given my complicated relocation situation. Honestly wish I'd known about this sooner. The system immediately flagged that my employer had incorrectly coded some of my moving expenses on my W-2, and gave me the exact documentation I needed to get it fixed. What really impressed me was how it clearly explained the difference between the actual relocation expenses and the tax gross-up portion. It even generated a letter I could send to my company's payroll department requesting a corrected W-2. Ended up saving me around $2,100 in taxes I didn't actually owe, plus it helped me avoid the underpayment penalty by showing that the error was on my employer's side.

If you're getting hit with an underpayment penalty and need to talk to the IRS about it, good luck getting through to a human. I spent WEEKS trying to reach someone at the IRS about my similar situation. Then I found Claimyr (https://claimyr.com) and watched their demo (https://youtu.be/_kiP6q8DX5c) - they got me connected to a real IRS agent in under 30 minutes. I explained my situation with the relocation expenses on my W-2 and the underpayment penalty. The agent walked me through my options, including how to request a one-time abatement of the penalty since I had a good payment history before this. They also explained exactly what documentation I needed from my employer to support my case. Never would have gotten this resolved without actually speaking to someone.

Coming back to eat my words. After my skeptical comment, I decided "what the hell" and tried Claimyr because I was desperate to talk to someone at the IRS about my own tax situation with employer reimbursements being misreported. Not gonna lie, I was SHOCKED when I got a call back saying they had an IRS agent on the line. The agent helped me understand exactly how to document the issue with my W-2 and file Form 8275 to explain the discrepancy. They also told me how to apply for first-time penalty abatement, which I didn't even know was an option. I just got confirmation that my penalty has been removed - that's $843 I don't have to pay now. Seriously would never have gotten this resolved without actually talking to someone who knew what they were doing.

Have you asked your employer for a detailed breakdown of the relocation package? They should provide you with documentation showing: 1. Actual moving expenses paid directly to vendors 2. Reimbursements paid to you 3. The gross-up amount (extra money added to cover taxes) With this breakdown, you can verify if they calculated everything correctly. Sometimes companies miscalculate the gross-up, especially if you're in a high tax bracket or moved to a state with different tax rates. Also check if your withholding for the pay period when they added the relocation was much higher than normal. The gross-up should have been withheld on at the same time they reported the income.

Is anybody else annoyed that companies do this? They make it sound like they're doing you a favor with relocation and then you get slammed with taxes. My company did the same thing - promised a "fully covered" move and then I ended up owing $5k in taxes. The grossed-up amount never covers the full tax impact!

This is exactly why I always recommend keeping detailed records of any employer-provided relocation benefits throughout the year. The IRS considers most relocation expenses as taxable income, and companies often don't explain this clearly upfront. For your current situation, you'll need to report all income shown on your W-2 - there's no way around that. But here are some steps that might help: 1. Request a detailed breakdown from your employer showing exactly what portion was actual expenses vs. gross-up amount 2. Check if any of the expenses qualify for exclusions (like certain temporary lodging costs) 3. For the underpayment penalty, you may qualify for an exception if your withholding met the safe harbor rules (90% of current year or 100% of prior year tax) 4. Consider filing Form 2210 to request a waiver based on unusual circumstances The key is documenting everything properly. Your employer should have calculated the gross-up to cover the tax impact, but if they used incorrect assumptions about your tax bracket or state taxes, you might have grounds to request additional compensation or a corrected W-2. Don't panic - this is more common than you think, and there are usually ways to minimize the damage if you handle it correctly.