On December 12, 2024, President Biden signed the Federal Disaster Tax Relief Act of 2023 (H.R. 5863), a significant piece of legislation aimed at providing much-needed tax relief to individuals and businesses affected by federal disasters.
While the federal gross income exclusion for qualified wildfire relief payments received was extended to include payments received by individuals in the 2020-2025 taxable years, taxpayers who may become involved in settlement negotiations or litigation regarding the current wildfires in Los Angeles County under the current law will not be able to exclude any qualified wildfire relief payments from their federal taxable income if received in 2026 and beyond.
Exclusion from Gross Income for Wildfire Compensation
This Act provides that any amount received as a qualified wildfire relief payment is excluded from gross income. A qualified wildfire disaster means any federally declared disaster declared after December 31, 2014, due to a forest or range fire.
This exclusion applies to payments received during taxable years starting after December 31, 2019, and before January 1, 2026. Because most individuals report their tax using the calendar year, this effectively means any qualifying payments received in 2020–2025.
A qualified wildfire relief payment includes compensation for:
- Losses, expenses, or damages, including compensation for additional living expenses, lost wages (other than compensation for lost wages paid by the employer which would have otherwise paid such wages),
- Personal injury, death, or emotional distress due to a qualified wildfire disaster,provided these are not covered by insurance or other compensation.
It is important to delineate that the wildfire compensation received can be related to any federal declared disasters that are wildfires after December 31, 2014, as long as the payment was generally received by the individual in the 2020, 2021, 2022, 2023, 2024 or 2025 taxable year.
If taxpayers are currently in litigation over their wildfire damages, they may lose out on the exclusion if the recovery payment is not made by the end of this year. Wildfire victims who are being paid in installments that span outside 2025, will also not be able to avail themselves to this exclusion for payments received in 2026 and beyond.
Due to the most recent California wildfires in Los Angeles, close attention should be made to see if Congress will extend the time in which wildfire qualifying payments can be received for purposes of the federal gross income exclusion.
If an individual has already filed a return without excluding gross income due to wildfire compensation, the individual can generally claim credits or refunds within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever is later. The statue of limitation is extended for previous tax returns filed, including the 2020 taxable year, provided the refund or credit is claimed by December 12, 2025.
Extension of Certain Disaster-Related Personal Casualty Losses
This Act also extends Section 304(b) of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (P.L. 116-260), providing tax relief for individuals and businesses in Presidentially declared disaster areas for major disasters declared from January 1, 2020, through February 10, 2025, which would include the most recently approved major disaster declaration by President Biden for the Los Angeles wildfires.
Under this Act, taxpayers can deduct uncompensated losses in disaster areas without being required to reduce each casualty loss by $500.
East Palestine Disaster Relief Payments
This Act also addresses the train derailment in East Palestine, Ohio on February 3, 2023. Payments related to this incident are treated as qualified disaster relief payments under Section 139(b) and are excluded from gross income. These payments include compensation for loss, damages, expenses, loss in real property value, closing costs with respect to real property (including realtor commissions), or inconvenience (including access to real property) resulting from the derailment. The payments must be provided by federal, state, or local government agencies, Norfolk Southern Railway, or any related person, including any subsidiary, insurer, or agent of Norfolk Southern Railway.
Authors: Yeonhee Oh | [email protected] and Lynn Mucenski-Keck, Principal and National Lead, Federal Tax Policy | [email protected]
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