At the end, I noticed that it included a $29 penalty. It appears that this is due to filing all her income, VA/DC combined, through VA, and since her VA withholding was low, she was penalized. No, you did not miss a step, this is the penalty for underpayment of estimated taxes. It is similar to the IRS underpayment penalty. Basically, all income earned earned anywhere around the world or in any other state is taxable to your home state. The US government and states are all pay as you go. This means, if you earn money in the first quarter of the year, it is your responsibility to make sure that the state as well as the IRS is getting "their share". So, if an employer is not withholding for the correct state, or if they are withholding too little, then you need to make estimated payments directly to them to make sure you are paying enough. As you continue through the state section, TurboTax will ask you if you want to apply for an underpayment penalty exemption. To qualify one must have paid at least 90% of their tax due for the current year or 100% of the tax liability for the previous year.
Or is better [or is there even an option] to file each State return separately even though she lives in VA? Each state is filed separately. There is not another way to do it for 2023. However, for 2024, she should file a form D4-A with her employer so that they stop withholding for DC and start withholding for VA.
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