Long-Awaited Disaster Tax Relief Act Signed into Law

Published: Dec 18, 2024
By: Jeffrey Kelson; Sarah E. Adkisson; Eric Greene
Topics: Tax

Disaster Recovery
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On December 12, 2024, President Biden signed H.R. 5863, the Federal Disaster Tax Relief Act of 2023 (“the Act”) into law. The Act grants taxpayers relief for payments received for certain disasters and extends the ability to deduct personal casualty losses. The Act is intended to provide needed tax relief for those who have experienced losses due to hurricanes (such as Ian, Nicole, Idalia, Helene, Debby, and Milton), the East Palestine train derailment, the California wildfires, and any disasters declared 60 days after the date of the Act’s enactment. Some taxpayers have waited nearly two years for this relief. Accordingly, many impacted taxpayers will need to file amended returns in order to take full advantage of the relief granted in the Act.

Extension of Casualty Loss Relief

Under current law, a taxpayer may only deduct casualty losses once they exceed 10% of the taxpayer’s adjusted gross income, with the amounts over the 10% threshold being deductible. The Act extends sections 301 and 304(b) of the Taxpayer Certainty and Disaster Relief Act of 2020, allowing taxpayers to instead deduct their casualty losses once they exceed $500 (applied per casualty) and eliminating the 10% adjusted gross income (AGI) threshold for claiming those losses. Taxpayers may take this deduction even if they do not itemize. This provision is applicable for all declared disaster occurring between January 1, 2020, and January 11, 2025 (if declared by February 9, 2025). Accordingly, taxpayers who were impacted by hurricanes, including Hurricanes Helene and Milton, as well as those impacted by wildfires in Hawaii and California, will be able to deduct these losses. Taxpayers can search the FEMA website to verify what disasters fall within the time period.

Qualified Disaster Payments

IRC Sec. 139(b) grants taxpayers income tax relief by allowing them to exclude qualifying relief payments from their gross income. The Act extends this relief to taxpayers who were impacted by certain wildfires and by the train derailment in East Palestine, Ohio.

Wildfire Relief Payments

Under the Act, taxpayers may exclude all compensation for losses or damages resulting from qualified wildfire relief payments from their gross income. This includes any amount received for losses, expenses, or damages, including:

Additional living expenses,
Lost wages (other than compensation for lost wages paid by the employer),
Personal injury,
Death, or
Emotional distress.

The Act defines a qualified wildfire disaster as any “federally declared disaster declared after December 31, 2014, as a result of any forest or range fire.” The relief is applicable to qualified wildfire relief payments received by the individual during taxable years beginning after December 31, 2019, and before January 1, 2026. By extending the applicability to future dates, taxpayers who are impacted by wildfires in 2025 will also be able to exclude such payments from their gross income.

East Palestine, Ohio Relief Payments

Taxpayers who were impacted by the East Palestine, Ohio, train derailment on February 2, 2023, are also granted relief under the legislation. Taxpayers who received payments as a result of the train derailment will likewise be able to exclude these payments from their gross income. This relief applies to amounts received on or after February 3, 2023, and includes any amount received as a result of the train derailment, by or on behalf of an individual, as compensation for:

Loss,
Damages,
Expenses,
Loss in real property value,
Closing costs with respect to real property (including realtor commissions), or
Inconvenience (including loss of access to real property).

As previously mentioned, many taxpayers who will benefit from this relief will have already filed their tax returns for the years in question. Taxpayers who were impacted by recent environmental disasters, such as wildfires or hurricanes, or other qualified disasters should reach out to a trusted tax advisor to determine how they should proceed.