New Law Delivers Tax Breaks to Natural Disaster Victims, But Is It Enough?

Millions of survivors of natural disasters will get much-needed tax breaks on compensation, but it’s only a drop in the bucket.

The Federal Disaster Tax Relief Act brings tax relief to victims of certain federally declared natural disasters and wildfires. Recently signed into law by President Biden, the new law allows those victims to claim qualified disaster-related losses without having to itemize deductions and eliminates the 10% adjusted gross income limit for claimants.

Additionally, the legislation makes compensation from settlements for disaster victims tax-free. The new tax relief package will help victims of recent hurricanes Helene and Milton and severe storms that have devastated areas of Alaska, Connecticut, Louisiana, Virginia, Pennsylvania, and Illinois.

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Californians impacted by wildfires, survivors of the East Palestine, Ohio train derailment, and anyone impacted by disasters declared up to 60 days after the law’s enactment, will also get tax relief.

The development follows calls from various government agencies and congressional leaders highlighting the need to replenish key disaster response programs, as noted in a White House memo.

While tax breaks should help victims receive slightly more compensation, FEMA and the Small Business Administration (SBA) have expressed that their funding to support disaster victims is running low or already exhausted.

Separately, Congress is aiming to secure around $100 billion in funding via a year-end stopgap deal targeting natural disasters.

Here’s what survivors of federally declared disasters can expect under the new tax relief law.

Federal bill targets tax relief for natural disaster victims

President Biden signed the Federal Disaster Relief Act of 2023 into law on Dec. 12. of this year. What can you expect?

• The Act extends certain provisions of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 and introduces several tax breaks targeting recent disasters.
• Families and individuals who experienced losses due to disasters such as hurricanes Helene and Milton, the California wildfires, the East Palestine, Ohio train derailment, and other recent federally declared disaster areas across the country, will receive crucial tax breaks on compensation.

Specifically, the measure would provide relief for individuals and businesses impacted by a presidentially declared disaster dating back to Dec. 2020. California wildfire victims will also be eligible for tax relief under the new law. Qualified wildfire relief payments date back a decade.

What is a qualified disaster area?

For this new law, a qualified disaster area is a location where a major disaster has been declared by the President during the period beginning January 1, 2020, and ending 60 days after the date of the law’s enactment.

Keep in mind, as mentioned, there’s an exception for wildfires that devastated California. (Federally declared wildfires date back to December 31, 2014.)

What kind of tax relief will natural disaster victims get?

Imagine losing your home and all of your belongings to a natural disaster and waiting to get compensated. Only to have the amount slashed by federal taxes.

Until now, personal casualty and theft losses related to a federally declared disaster were subject to a $100 per casualty and 10% of your adjusted gross income (AGI) reduction. Taxpayers also had to itemize deductions to claim any losses as a result of a qualified disaster.

Now, this new law simplifies the process for claiming losses. Briefly, survivors of qualified federally declared disasters:

• No longer have to itemize deductions to claim losses
• Compensation won’t be subject to a 10% adjusted gross income reduction threshold
• Taxpayers from qualified wildfire disasters can claim a credit or refund related to relief payments received on or after December 31, 2019 (or previously included in gross income)
• Survivors or victims of the East Palestine, Ohio train derailment may exclude related compensation payments from gross income

California wildfire victims get tax relief

The newly enacted Federal Disaster Tax Relief Act also delivers relief to thousands of Californians who were victims of wildfires over the past decade.

A qualified wildfire disaster is any federally declared disaster after December 31, 2014, due to a forest or range fire.

Where will wildfire victims see tax relief?

• Payments made to compensate wildfire victims for their loss are exempt from federal income tax, including attorney and settlement fees
• Shields payment receipts from losing benefits, such as Covered California premium subsidies, VA co-pay assistance, and FAFSA
• This applies to any wildfire payments received from 2020 to 2025 for federal wildfire disasters that occurred after 2014

According to government calculations, an estimated $512 million in taxes will be returned to wildfire victims and survivors.

Qualified wildfire relief payments are amounts received by or on behalf of an individual as compensation for expenses or losses incurred due to the incident. Payments don’t include reimbursement by an insurance company or related party.

The California wildfires tax relief provision was included in the bill after California state Reps. Mike Thompson (D-St. Helena) and Doug LaMalfa (R-Richvale) pushed forward legislation asking for crucial relief to thousands of victims in their communities.

Over the past decade, multiple wildfires have devastated several communities across California. This led to entire communities being destroyed, fatalities, and survivors left to pick up the pieces.

“While no fire victim can ever be made truly whole, this law will provide needed and deserved relief to thousands in our community and across our country,” Thompson said.

East Palestine Village communities will also benefit

If you were a resident of Ohio and Pennsylvania and are recovering from the East Palestine train derailment, you’ll also get some tax relief.

According to the legislation, amounts received by or on behalf of an individual as compensation for loss, damages, and expenses as a result of the train derailment are equal to qualified disaster payments that will be tax-free and not subject to your adjusted gross income level.

The East Palestine relief payments must be due to the train derailment of February 3, 2023.

These also include compensation for expenses incurred for:

• Loss in real property value
• Closing costs in respect to real property (including realtor commissions), or,
• Inconvenience (including access to real property)

There’s one caveat: said amounts in compensation must have been provided by the following:

1. A federal, state, or local government agency
2. Norfolk Southern Railway
3. Any subsidiary, insurer, or agent of Norfolk Souther Railway or any related person

Bottom line: Federal funding for disaster programs

The last time a comprehensive natural disaster tax relief package was passed by Congress was two years ago, and the Federal Disaster Tax Relief Act brings much-needed relief one step further.

Families and individuals impacted by federally declared natural disasters, including wildfires will have an easier experience when claiming losses. Additionally, compensation received as a result of the qualifying disaster will no longer be subject to taxes or income-based reductions.

Congress aims to secure over $100 billion in funding for natural disasters in a year-end deal

Separately, Congressional leaders have reportedly reached a deal on stopgap legislation that could deliver more than $100 billion in emergency aid for disaster relief through March 2025 as part of their year-end package.

Details are expected soon, but, for now, the Federal Disaster Relief Act offers eligible taxpayers some relief.

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