The SAFE Act removes penalties for individuals who fail to pay income tax if they timely pay 125% of their income tax liability from the previous year, effective for taxable years beginning after December 31, 2024.
Judy Chu
Representative
CA-28
The SAFE Act removes penalties for individuals who fail to pay income tax if they pay at least 125% of their previous year's income tax liability on time. Certain conditions apply, such as having filed a return the previous year and the previous tax year being 12 months. This exception is valid until the tax return due date or filing date, and takes effect for taxable years starting after December 31, 2024.
New 'SAFE Act' Tax Bill Lets You Pay 125% of Last Year's Taxes to Avoid Penalties—Starting 2025
The Simplify Automatic Filing Extensions (SAFE) Act aims to cut some slack for taxpayers who might have trouble figuring out their exact tax bill each year. Basically, if you pay at least 125% of what you owed in taxes the previous year, you're off the hook for underpayment penalties—even if you end up owing more. This change kicks in for tax years starting after December 31, 2024.
Playing It Safe with Taxes?
The core idea here is to give a little breathing room, especially to folks whose income jumps around a lot—like freelancers, small business owners, or anyone with significant side hustles. Instead of stressing over getting your estimated tax payments exactly right throughout the year, you've got a clear target: 125% of last year's bill. (SEC. 2)
For example, if you owed $10,000 in taxes last year, paying $12,500 this year would keep you clear of penalties, even if your actual tax bill turns out to be higher. But, if you are a high earner whose income is steadily increasing, keep in mind that you may still owe quite a bit come Tax Day. It just means no penalties.
However, there are catches. You must file a return to use this safe harbor, and you had to have filed a return for the full 12 months of the previous year. (SEC. 2)
Joint Returns: Proceed with Caution
Things get a bit trickier with joint returns. If you filed jointly last year but not this year, the entire previous joint tax amount counts towards your 125% target. If you didn't file jointly last year, they'll add up the tax amounts from both spouses' individual returns to set the target. This could get messy for couples going through separation or divorce, so get your paperwork straight. (SEC. 2)
The Bottom Line
While the SAFE Act might simplify things for some, it's not a free pass. You still need to pay your actual tax bill eventually. This just buys you some time and flexibility. It will be interesting to see if people start to intentionally overpay one year to game the system the next, or if this truly helps those with fluctuating incomes. And, as always, if your income is way up one year, the 125% rule might not cover everything you owe, so careful planning is still key. This bill mainly helps avoid penalties, not taxes themselves.