New Tax Breaks Provide Disaster Relief

By Ashley Barbera February 10, 2025

In mid-December, President Biden signed the Federal Disaster Relief Act of 2023 into law. This legislation was passed by the House many months ago but passed by the Senate only a few weeks ago. It provides relief for taxpayers who experienced losses due to disasters dating back to December 2019, covering personal casualty losses incurred by victims of Hurricanes Ian, Idalia, Nicole, Fiona, Debby, Helene, and Milton; the East Palestine disaster relief payments in Ohio; wildfires in Hawaii; and many other disasters. To qualify, the disasters must have commenced during the period beginning December 28, 2019 and ending December 12, 2024, and must have ended no later than January 11, 2025. A breakout of all disasters that have been federally announced during this period can be reviewed by going to the FEMA website and the IRS website. Note that the disaster must have been presidentially declared in order to qualify.

We have written several articles discussing timing relief related to many of these disasters, whereby the IRS provided automatic extensions of time to file tax returns and make payments. But this legislation is very different, in that it goes far beyond mere timing by providing greatly enhanced deductions and the ability to avoid inclusion of certain relief payments in taxable income.

Enhanced deductions

Outside of this legislation, tax breaks related to property damage come with some significant guardrails that often prevent any meaningful benefit. Under general rules, no deduction exists unless the so-called casualty loss exceeds 10% of a taxpayer’s adjusted gross income (AGI). For example, if you had an AGI of $1,000,000, you would need to show losses of over $100,000 before you could receive any benefit (and the deduction would only apply to the excess over $100,000). This also requires a taxpayer to use itemized deductions, reported on Schedule A, to have any chance of claiming personal casualty losses. Filers who use the standard deduction receive no benefit.

Those who qualify for the new disaster relief stand a much better chance of claiming a tax deduction for their losses. This new legislation eliminates the 10% limitation and no longer requires taxpayers to itemize to use this benefit. Affected taxpayers are now able to recoup some of the losses associated with the disasters with this welcomed change. The new legislation changes the threshold from 10% of AGI to $500 and makes the casualty loss an “above the line” deduction. Many affected victims will now be able to report their casualty losses of over $500 and, if they don’t have enough other deductions to itemize, they can utilize this casualty loss along with the standard deduction. These losses can also be included in computing alternative minimum taxable (AMT) income.

Please keep in mind that deductible losses must be reduced by the amount of any reimbursements you receive related to that loss (insurance claims). For disaster relief that occurred in 2021, 2022, or 2023, you may need to file an amended return for that year to claim the benefit of the loss deduction. Casualty loss deductions relating to tax year 2024 can be reported on your 2024 tax return.

Exclusion from income – wildfires

Taxpayers who received qualified wildfire relief payments are now able to exclude these payments from their gross income. These payments include compensation received for losses, expenses, or damage, including payments for additional living expenses, lost wages, personal injury, death, or emotional distress. This provision applies to any and all payments for qualified wildfire relief that were received between December 31, 2019, and January 1, 2026. Note that there is explicit language in this legislation that prohibits a double benefit. If taxpayers use their payments to improve property or purchase new property, they will not be permitted to increase their basis in the property. Similar to the personal use casualty loss deduction, payments that are also reimbursed by insurance (which, itself, is often tax-free) are ineligible for the exclusion. Those who previously reported income related to these payments on prior year returns may amend their returns to claim a refund on taxes paid on this income.

Exclusion from income – train derailment

Taxpayers who were impacted by the East Palestine, Ohio train derailment are granted relief as well. Any qualified disaster relief payments may be excluded from gross income, pursuant to Internal Revenue Code Section 139(b). The payments must be related directly to the train derailment that occurred on February 3, 2023, and be issued by a federal, state, or local government agency; Norfolk Southern Railway; or a subsidiary, insurer or agent of Norfolk Southern Railway. Only payments received after February 3, 2023 qualify. Those who previously reported income related to these payments may amend their returns to claim a refund on taxes paid on this income.

Filing deadline extensions – wildfires

Frustratingly, the victims of the California wildfires (which started on January 7, 2025) are not eligible for any of this relief as it falls outside the ending range of December 12, 2024. Further legislation will need to be enacted by Congress to provide any income or expense-related disaster relief for these victims. However, the IRS has the authority to provide extensions of time to file returns and make payments, and they have done so for victims of the California wildfires. Specifically, IR-2025-10 provides automatic extensions of time until October 15, 2025 to file many returns and make related payments of tax that otherwise would have been due in the period beginning January 7, 2025 through October 15, 2025. IR-2025-10 may be consulted for additional details, but it generally impacts individual income tax returns (Form 1040) and also estimated payments for Q1 (normally due April 15), Q2 (normally due June 15), and Q3 (normally due September 15) and payments due with the return (normally due April 15). This deadline change also applies to partnership (Form 1065), S corporation (Form 1120S), corporation (Form 1120), fiduciary (Form 1041), estate (Form 706), gift (Form 709), and exempt organization (Form 990) return filings.

If you have questions related to disaster relief under the Federal Disaster Relief Act of 2023, please contact Ashley Barbera or your tax advisor at 800.244-7444.