Long-awaited disaster relief tax bill officially becomes law

ARTICLE | December 17, 2024

Authored by RSM US LLP

Executive summary

On Dec. 12, 2024, President Biden signed the Federal Disaster Tax Relief Act of 2023 (H.R. 5863) into law. This legislation provides long-awaited favorable tax provisions for disaster victims, including the elimination of the requirement that personal casualty losses must exceed 10% of adjusted gross income (“AGI”).

Disaster relief tax bill officially signed into law on Dec. 12, 2024

On Dec. 12, 2024, President Biden signed the Federal Disaster Tax Relief Act of 2023 (H.R. 5863) into law. This legislation provides long-awaited favorable tax provisions for disaster victims.

Personal use casualty loss relief

The legislation allows for special provisions for qualified disaster-related personal casualty losses, including the elimination of the requirement that casualty losses must exceed 10% of an individual’s adjusted gross income (“AGI”) before becoming deductible. Normally, only the portion of casualty losses exceeding 10% of AGI can qualify for deduction. With the new legislation, the AGI threshold is eliminated, and each separate casualty is deductible once it exceeds a more modest $500 floor. Individual taxpayers will be allowed to claim this type of casualty loss “above the line”, meaning even if they don’t itemize their deductions, they can still take the casualty loss in addition to the standard deduction. This favorable treatment is available for all presidentially declared disasters occurring between Jan. 1, 2020, and Jan. 11, 2025 (if declared by Feb. 9, 2025). This includes major recent disasters such as Hurricane Helene, Hurricane Milton, Hurricane Ian and the wildfires in Hawaii and California, among many other disasters that occurred over the last four years. See FEMA website to search for specific disasters that fall within this qualified period.

Qualified wildfire relief payments

The legislation allows taxpayers to exclude from gross income all compensation for losses or damages resulting from qualified wildfires relief payments. Qualified wildfire relief payments include any amount received as compensation for losses, expenses, or damages, including compensation for: additional living expenses; lost wages (other than compensation for lost wages paid by the employer which would have otherwise paid such wages); personal injury, death or emotional distress; if losses arose from a qualified wildfire disaster and were not compensated by insurance or otherwise. A qualified wildfire disaster is any federally declared disaster resulting from any forest or range fire. This provision applies to qualified wildfire relief payments received by the individual during taxable years beginning after Dec. 31, 2019, and before Jan 1, 2026. Taxpayers should note that this legislation prohibits a double benefit – no deduction or credit shall be allowed for any expenditure to the extent the amount was excluded from income. If a taxpayer uses these qualified payments to acquire or improve property, the taxpayer cannot increase their basis in the property. Lastly, in the case of a claim for credit or refund related to these qualified wildfires relief payments, the statute of limitation for filing such claim will not expire earlier than 1 year after the date of the enactment of this law. Other limitations that would normally apply to the claim (as described in section 6511(b)(2)) will not apply in this case.

East Palestine (Ohio) disaster relief payments

This provision provides necessary relief for the victims of the East Palestine, Ohio train derailment, treating relief payments as qualified disaster relief payments under section 139(b). Section 139(b) allows taxpayers to exclude qualifying relief payments from gross income. East Palestine Train Derailment Payments include any amount received by 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 access to real property) resulting from the East Palestine train derailment on Feb. 3, 2023. This only includes amounts provided by (1) a Federal, State or local government agency, (2) Norfolk Southern Railway, or (3) any subsidiary, insurer or agent of Norfolk Southern Railway. This provision applies to any such payments received on or after Feb. 3, 2023.

Takeaways

Taxpayers have eagerly anticipated a bill designating qualified disasters to drop the 10% AGI floor. Historically, Congress usually passes a bill to cover major disasters at the scale of Hurricanes Ian and Helene. 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 tax advisors if they experienced losses from federally declared disasters between 2021 and 2023 or received relief payments from wildfires or the East Palestine Train Derailment.