New Federal Law Expands Tax Relief for Disaster Victims
A newly signed federal law gives individuals affected by recent federally declared disasters more favorable tax treatment for unreimbursed personal casualty losses.
The law applies nationally. Depending on the federal declaration and the dates involved, it helps taxpayers affected by hurricanes, floods, tornadoes, earthquakes, wildfires, severe storms, and other major disasters. It also provides a separate income exclusion for certain wildfire relief payments.
A More Favorable Deduction for Qualified Disaster Losses
Personal casualty losses are subject to restrictive federal tax rules. H.R. 5366 creates special treatment for qualified disaster-related personal casualty losses arising in an area covered by a presidential major-disaster declaration under the Stafford Act. To qualify under the new provision, the disaster's FEMA incident period must begin on or after December 28, 2019, and before January 1, 2027.
For qualified losses, the new law provides three important benefits:
- The taxpayer may claim the qualified net disaster loss even without itemizing deductions.
- The usual reduction equal to 10 percent of adjusted gross income does not apply to the qualified net disaster loss.
- Each qualified casualty loss is reduced by $500 rather than being subject to the ordinary $100 reduction.
These changes can make a substantial difference. Under ordinary rules, a taxpayer may receive little or no deduction after applying the adjusted-gross-income limitation. Under the special disaster rules, a larger portion of an eligible unreimbursed loss may produce a federal tax benefit.
The Deduction Is Not Based on Repair Cost Alone
The tax loss is not necessarily the amount spent to repair or replace damaged property. In general, the casualty loss for personal-use property is based on the lesser of the property's adjusted tax basis or the decrease in fair market value caused by the casualty, reduced by insurance proceeds and other reimbursements. Repair costs may sometimes help establish the decrease in value, but they do not automatically equal the deductible loss.
Taxpayers should retain photographs, appraisals, purchase and improvement records, insurance claims, settlement statements, contractor estimates, receipts, and FEMA information. A taxpayer must make a timely insurance claim when insurance coverage is available. There is no deduction for the portion of a loss that is reimbursed or reasonably expected to be reimbursed.
A Federal Declaration and the Incident Dates Matter
A damaging event does not qualify merely because it was severe or because state or local officials declared an emergency. The property must be in an eligible area associated with a presidential major-disaster declaration, and the loss must be attributable to that disaster. FEMA's declaration, designated counties, and official incident period should be checked carefully.
The casualty-loss amendments apply to tax years beginning after December 31, 2024. They are therefore especially relevant to 2025 and 2026 federal returns. A taxpayer who already filed a 2025 return involving a qualified disaster loss may want me to review whether an amended return could provide a benefit. Earlier tax years remain subject to the disaster-relief provisions that applied to those years.
Special Rule for Certain Wildfire Relief Payments
The Act also adds a separate exclusion from gross income for qualified wildfire relief payments received in tax years beginning after December 31, 2025. The underlying wildfire must be a federally declared disaster declared after December 31, 2014, and before January 1, 2027, because of a forest or range fire.
Potentially covered payments include compensation for otherwise unreimbursed additional living expenses, certain lost wages, personal injury, death, emotional distress, and other losses or damages resulting from a qualified wildfire. The exclusion does not apply to regular wages paid by the employer that otherwise would have paid them. It also does not permit a double tax benefit. An expense covered by an excluded payment cannot also support a deduction or credit, and the excluded amount cannot increase the basis of property.
What Disaster Victims Should Do Now
Taxpayers affected by a recent disaster should not assume either that all assistance is taxable or that every loss is deductible. The result depends on the federal declaration, incident period, location of the property, type of payment, insurance recovery, tax basis, and timing.
A useful first step is to gather the FEMA disaster number, insurance records, proof of the property's tax basis, evidence of the damage, and details of every relief or settlement payment. Taxpayers who already filed a return for an affected year may also want to determine whether the new law creates an amendment opportunity.
The article is meant for informational purposes only. Please contact me directly to discuss how this applies to your individual tax situation.