Federal Disaster Tax Relief: New Opportunities for Taxpayers
The Federal Disaster Tax Relief Act introduces critical measures to ease the financial burden on individuals affected by disasters and allows taxpayers to file amended returns or seek refunds for losses that were previously non-deductible. Individual taxpayers are encouraged to consult their W&D advisors if they experienced losses from federally declared disasters between 2021 and 2024 or received relief payments from wildfires or the East Palestine Train Derailment.
On December 12, 2024, the Federal Disaster Tax Relief Act of 2023 was signed into law, providing new opportunities for tax payers. The Act introduces significant tax relief measures for individuals and families impacted by disasters. This long-anticipated legislation provides a variety of benefits, including expanded deductions and exclusions from gross income for qualified disaster-related expenses. Below, we outline the key provisions and how they may benefit taxpayers.
Expanded Casualty Loss Deductions
One of the most noteworthy changes under this new law is the elimination of the 10% Adjusted Gross Income (AGI) floor for qualified disaster-related personal casualty losses. Previously, taxpayers could only deduct casualty losses exceeding 10% of their AGI, limiting relief for many individuals. Under the new provisions:
- Qualifying disasters – Casualty losses are eligible if they result from a presidentially declared disaster occurring between December 28, 2019, and January 11, 2025 and officially declared by February 9, 2025. This includes major recent disasters such as Hurricane Helene, Hurricane Milton, Hurricane Ian and the wildfires in Hawaii, and wildfires in California, among many other disasters that occurred over the last four years. See the FEMA website to search for specific disasters that fall within this qualified period.
- $500 floor – Casualty loss is subject to a modest $500 floor.
- “Above the line” deduction – Taxpayers can claim these losses even if they take the standard deduction, offering broader access to relief.
- No deadline extensions – The legislation does not extend the time to amend prior-year returns or request refunds for these losses.
Wildfire Relief Payments: Exclusions from Income
The Act also addresses the increasing prevalence of wildfires by excluding qualified wildfire relief payments from gross income. Key points include:
- What’s covered – Compensation for losses, damages, additional living expenses, emotional distress, and other wildfire-related costs not covered by insurance.
- Eligibility period – Payments received after December 31, 2019, and before January 1, 2026, qualify for this exclusion.
- Double benefit prohibition – Taxpayers cannot deduct expenses covered by these payments or use them to increase the basis of property improvements.
- Extended refund claims – Taxpayers have at least one year from the law’s enactment to file claims for refunds related to these payments.
NOTE: The IRS announced new tax relief for taxpayers impacted by current wildfires in California, where various deadlines are postponed to October 15. The state of California has also recently announced certain tax relief for taxpayers located in Los Angeles County due to the wildfires.
Specific Relief for East Palestine Train Derailment Victims
Special provisions in the Act provide relief for victims of the February 3, 2023 train derailment in East Palestine, Ohio. Relief payments related to this disaster are excluded from gross income and cover:
- Losses and damages to property.
- Compensation for inconvenience, closing costs, and diminished property value.
- Payments provided by federal, state, or local agencies, Norfolk Southern Railway, or its affiliates.
- Applies to payments received on or after February 3, 2023.
What This Means for Taxpayers
The Federal Disaster Tax Relief Act introduces critical measures to ease the financial burden on individuals affected by disasters. By eliminating the AGI threshold for casualty losses, expanding exclusions for wildfire relief payments, and addressing specific events like the East Palestine train derailment, the legislation ensures broader and more equitable access to tax relief.
This provides sorely needed relief and allows taxpayers to file amended returns or seek refunds for losses that were previously non-deductible. Individual taxpayers are encouraged to consult their W&D advisors if they experienced losses from federally declared disasters between 2021 and 2024 or received relief payments from wildfires or the East Palestine Train Derailment.
If you believe you qualify for any of these benefits, please connect with your Warady & Davis LLP advisor. Our team is here to help you navigate these changes and maximize the relief available to you.
Warady & Davis LLP will continue to keep you informed regarding available disaster relief. You may also contact your Warady & Davis LLP business advisor with any additional questions or concerns – (847) 267-9600 or [email protected]. Visit Tax Services for more information on how W&D can assist you.
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