In December 2024, the Federal Disaster Tax Relief Act was enacted, bringing significant tax relief to victims of natural disasters, including wildfires. This legislation, signed into law by President Biden on December 12, 2024, retroactively exempts many legal settlements resulting from wildfires from federal income tax for tax years beginning after December 31, 2019, and before January 1, 2026.
This new federal law aligns with California’s state tax policy, which has already provided similar relief. In 2022, California passed legislation exempting wildfire settlements from state income tax, ensuring that victims did not face additional financial burdens. The Federal Disaster Tax Relief Act now extends this relief at the federal level, catching up with California’s existing protections.
Key Provisions of the Federal Disaster Tax Relief Act
- Exclusion of Settlements from Taxable Income: Wildfire victims receiving legal settlements, including those from the Fire Victim Trust (FVT), can now exclude these amounts from their federal taxable income. This change reduces overall tax liability and prevents additional financial hardship for victims already dealing with loss and recovery.
- Elimination of the 10% AGI Threshold: Previously, personal casualty losses had to exceed 10% of adjusted gross income (AGI) to be deductible. The new law removes this requirement, allowing more victims to claim deductions for their losses.
- Amendments for Prior Tax Years: Taxpayers who reported wildfire settlement payments as taxable income in previous years may be eligible to amend their tax returns and potentially receive refunds.
Who Is Eligible for This Tax Relief?
Eligibility for this tax relief generally includes:
- Individuals and Businesses Affected by Wildfires: Those who received settlements from legal claims related to wildfire damages, particularly from the Fire Victim Trust or other similar compensatory programs.
- Victims of Federally Declared Disasters: The tax relief applies to victims of disasters officially recognized by the federal government, primarily those affected by major wildfires in California.
- Taxpayers Who Previously Paid Taxes on Settlement Amounts: Those who reported wildfire compensation as taxable income in previous years may now qualify for refunds by filing amended tax returns.
Impact on Fire Victim Trust Beneficiaries
The Fire Victim Trust (FVT), established to compensate victims of specific California wildfires, has been a crucial resource for many. Under California’s 2022 law, these settlements were already exempt from state income tax. With the passage of the Federal Disaster Tax Relief Act, payments received from the FVT are now excludable from federal income tax as well. This ensures that beneficiaries receive their full settlements without additional tax burdens at either the state or federal level.
Steps for Affected Taxpayers
- Determine Your Eligibility: If you received a wildfire-related settlement, particularly from the Fire Victim Trust, confirm whether the tax relief applies to you.
- Amend Prior Tax Returns: If you previously reported FVT payments as income, consider filing amended returns to claim refunds. For 2020 and 2021 returns, amendments can be filed until December 12, 2025.
- Consult Tax Professionals: Given the complexities of tax laws, it’s advisable to consult with tax professionals to ensure compliance and to maximize potential refunds.
- Stay Informed: Regularly check updates from the Fire Victim Trust, the IRS, and the California Franchise Tax Board for any additional guidance or changes.