New 2026 Disaster Tax Law: Casualty Losses and Wildfire Relief
A new federal tax law provides additional relief for individuals who suffered property losses from major disasters or received compensation for certain wildfire damages. The Doug LaMalfa Federal Disaster Tax Relief Certainty Act, signed into law on September 11, 2026, expands the federal tax treatment of qualified disaster losses and establishes a new statutory exclusion for certain wildfire relief payments.
The legislation can affect taxpayers recovering from California wildfires, hurricanes, flooding, and other federally declared disasters. Some provisions apply retroactively to 2025, while the wildfire payment exclusion applies to qualifying payments received beginning in 2026.
The new rules also create important differences between federal and California income tax treatment. Taxpayers evaluating a disaster loss or settlement should consider these differences as part of their broader proactive tax planning.
What Changed Under the New Disaster Tax Law?
Public Law 119-108 was enacted on September 11, 2026. It makes two principal changes to the Internal Revenue Code.
- Qualified disaster casualty losses: The law adds Section 165(h)(6), providing special deduction rules for qualifying personal casualty losses attributable to major federally declared disasters.
- Wildfire relief payments: The law adds Section 139M, excluding certain compensation received by individuals for losses, expenses, and damages resulting from qualifying wildfires.
The casualty loss provisions apply to taxable years beginning after December 31, 2024. The wildfire payment exclusion applies to payments received in taxable years beginning after December 31, 2025.
These are enacted federal tax provisions, not proposed regulations or pending legislation.
Qualified Disaster Losses Are No Longer Subject to the 10% AGI Limitation
Ordinary personal casualty losses are generally subject to limitations under Section 165(h).
Under the normal rules, an individual generally reduces each personal casualty loss by $100 and may deduct the remaining net personal casualty loss only to the extent it exceeds 10% of adjusted gross income. Special rules apply when personal casualty gains are involved.
Public Law 119-108 provides more favorable treatment for qualified disaster losses.
Under the new Section 165(h)(6), a qualifying disaster loss generally receives the following treatment:
- The reduction is $500 per casualty rather than the ordinary $100 amount.
- The qualified net disaster loss is not subject to the normal 10% AGI limitation.
- The qualified net disaster loss can be deducted even when the individual does not otherwise itemize deductions.
The removal of the 10% AGI limitation can be particularly important for taxpayers with substantial income.
Example: How the New Casualty Loss Rules Can Affect a High Income Taxpayer
Assume the following:
- Adjusted gross income: $500,000
- Unreimbursed personal casualty loss from one qualifying disaster: $100,000
- No offsetting personal casualty gains
- The loss satisfies the applicable adjusted basis and valuation requirements
Under the ordinary personal casualty loss limitations, the 10% AGI threshold would be $50,000.
After the normal $100 per casualty reduction and the $50,000 AGI limitation, the potential deduction would be $49,900.
Under the qualified disaster rules, the $500 reduction applies, but the 10% AGI limitation does not.
The resulting qualified disaster loss deduction would generally be $99,500.
Difference in deductible loss: $49,600.
This simplified example illustrates the effect of the special limitations. The actual deduction depends on the property's adjusted basis, decline in fair market value, insurance recoveries, other reimbursements, and the application of Section 165 to the taxpayer's complete casualty loss and gain position.
Which Disasters Qualify for the Special Federal Deduction?
The new law does not apply the favorable qualified disaster rules to every fire, flood, hurricane, or other casualty.
Section 165(h)(6) generally requires the loss to arise in a qualified disaster area and be attributable to a major disaster declared by the President under Section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act.
The legislation defines a qualifying disaster area by reference to a major disaster whose incident period begins:
- On or after December 28, 2019, and
- Before January 1, 2027.
This expanded period is significant because it encompasses qualifying disasters occurring in 2025 and 2026, as well as certain earlier disasters.
However, the property must actually be located in an eligible disaster area, and the loss must be attributable to the qualifying disaster.
A taxpayer should confirm the applicable FEMA major disaster declaration, covered geographic area, incident period, and nature of the loss before applying the special deduction rules.
State Declared Disasters Are Treated Differently
Beginning in 2026, Section 165 also permits certain personal casualty losses attributable to a state declared disaster to qualify for a federal deduction.
However, a disaster declared only by a state generally does not satisfy the separate qualified disaster definition under Section 165(h)(6).
Consequently, a casualty loss attributable solely to a state declared disaster may be deductible under the applicable Section 165 rules but remain subject to the ordinary $100 per casualty reduction and 10% AGI limitation.
The distinction is important. A federal deduction may be available without the loss qualifying for the more favorable treatment provided by the new disaster legislation.
Taxpayers Can Claim Qualified Disaster Losses Without Itemizing
The new law also amends Section 63(b) to allow qualifying net disaster losses to reduce taxable income even when the taxpayer claims the standard deduction.
This is important because the standard deduction may otherwise exceed a taxpayer's ordinary itemized deductions.
Without the special rule, a taxpayer who does not itemize might receive little or no additional federal deduction from a casualty loss.
For qualifying disaster losses, the law permits the special disaster loss deduction in addition to the standard deduction, subject to the applicable computation requirements.
This creates a meaningful benefit for taxpayers who suffered substantial uninsured losses but do not ordinarily itemize deductions.
October 15, 2026, May Be an Important Deadline for 2025 Disaster Losses
Important deadline: October 15, 2026
For a calendar year individual who sustained an eligible federally declared disaster loss during 2025, October 15, 2026, is generally the deadline to elect to deduct the loss on the 2024 federal income tax return, unless an applicable postponement or other relief changes the deadline.
Section 165(i) allows taxpayers with qualifying federally declared disaster losses to elect to treat the loss as occurring in the taxable year immediately preceding the disaster year.
For example, a taxpayer who suffered a qualifying loss during the January 2025 California wildfires may be eligible to deduct the loss on the 2024 return instead of the 2025 return.
The election can be made on an original or amended return for the preceding year. A taxpayer who already filed the 2024 return would generally use Form 1040-X with the required Form 4684 information.
Treasury Regulation Section 1.165-11(f) generally requires the election to be made within six months after the unextended due date for the disaster year return.
For most calendar year individuals with a 2025 disaster loss, that produces an October 15, 2026, election deadline.
The decision should not be based solely on which year produces the earliest refund. The taxpayer should compare the federal tax benefit in both years, including differences in marginal tax rates, adjusted gross income, other deductions, credits, and any applicable limitations.
A taxpayer who already deducted the loss on the disaster year return must also follow the applicable rules for removing that deduction before claiming the same loss on the preceding year return.
The new law's retroactive applicability makes this election worth reviewing promptly for qualifying 2025 losses.
The New Law Excludes Certain Wildfire Relief Payments From Federal Income
A separate provision of Public Law 119-108 adds Internal Revenue Code Section 139M.
Section 139M excludes qualifying wildfire relief payments received by individuals from federal gross income.
The exclusion generally covers compensation for losses, expenses, or damages resulting from a qualified wildfire disaster.
The statute expressly includes certain payments relating to:
- Additional living expenses
- Lost wages, subject to a specific exception
- Personal injuries
- Death
- Emotional distress
- Other qualifying losses, expenses, or damages attributable to the wildfire
The exclusion applies only to the extent the underlying losses, expenses, or damages were not otherwise compensated by insurance or another source.
Compensation for lost wages that an employer would otherwise have paid is specifically excluded from the statutory definition of qualified wildfire relief payments.
Which Wildfires Qualify Under Section 139M?
The wildfire exclusion has a different eligibility period from the qualified casualty loss rules.
Under Section 139M(b)(2), a qualified wildfire disaster generally means a federally declared disaster resulting from a forest or range fire that was declared:
- After December 31, 2014, and
- Before January 1, 2027.
The exclusion applies to qualifying payments received in taxable years beginning after December 31, 2025.
Therefore, an individual who receives a qualifying wildfire settlement during 2026 may be eligible for the federal exclusion even if the underlying wildfire occurred several years earlier.
The law does not require the wildfire itself to occur during 2026.
The date and nature of the federal disaster declaration, the reason for the payment, and the year the payment is received must all be evaluated.
Wildfire Settlement Payments Received After 2025 May Qualify
The timing of settlement payments can be important because wildfire litigation and insurance claims may continue for years after the underlying disaster.
A taxpayer might suffer damages from a wildfire in one year but not receive settlement compensation until several years later.
Under Section 139M, the federal exclusion applies to qualifying payments received in taxable years beginning after December 31, 2025, provided the underlying disaster and payment satisfy the statutory requirements.
This can be relevant to individuals receiving compensation from utilities, insurers, settlement administrators, or other parties responsible for compensating wildfire damages.
However, not every payment described as a wildfire settlement necessarily qualifies for exclusion.
The payment must fall within the statutory definition, and amounts already compensated by insurance or another source cannot generate a duplicate federal tax benefit.
The allocation among property damage, living expenses, lost wages, emotional distress, interest, and other settlement components should be reviewed against the governing tax provisions.
A settlement agreement's description of the payment can be relevant evidence, but the actual facts and substance of the payment determine the applicable tax treatment.
The Federal Exclusion Does Not Permit a Double Tax Benefit
Section 139M(c) includes provisions designed to prevent taxpayers from receiving multiple federal tax benefits for the same economic loss.
When a payment is excluded from income under Section 139M:
- A taxpayer cannot claim a deduction or credit for an expenditure to the extent it was compensated by the excluded payment.
- The excluded payment does not increase the basis or adjusted basis of property.
This distinction matters when a wildfire settlement compensates a taxpayer for damage to a residence or other property.
For example, a payment excluded from income under Section 139M does not automatically create additional federal tax basis in the damaged or replacement property.
Property basis, casualty loss deductions, reimbursements, and settlement payments should therefore be reconciled together.
How Is the Amount of a Casualty Loss Determined?
The new disaster legislation changes certain deduction limitations, but it does not eliminate the underlying rules used to measure a casualty loss.
Treasury Regulation Section 1.165-7 generally measures a casualty loss using the lesser of:
- The reduction in the property's fair market value caused by the casualty, or
- The property's adjusted tax basis.
Applicable insurance recoveries and other reimbursements must then be considered.
Different rules can apply to certain business or income producing property, including property that is completely destroyed.
A personal residence may have appreciated substantially before a wildfire. That appreciation does not automatically increase the taxpayer's deductible casualty loss because adjusted tax basis remains an important limitation.
Taxpayers should preserve documentation supporting:
- Original property cost and subsequent basis adjustments
- Property value immediately before and after the casualty
- Insurance claims, payments, and expected recoveries
- Repair and rebuilding costs
- Settlement agreements and payment allocations
- Federal disaster declarations and applicable disaster dates
- Previous casualty loss deductions and related tax filings
If a reimbursement claim has a reasonable prospect of recovery, the timing of the deductible loss may also be affected. A taxpayer generally cannot deduct a loss that is reasonably expected to be reimbursed.
The reporting and substantiation requirements remain important even when the special disaster deduction rules eliminate the 10% AGI limitation.
California Does Not Automatically Follow the New Federal Rules
California taxpayers must separately determine how the disaster loss or wildfire payment is treated for state income tax purposes.
California does not automatically conform to federal tax legislation enacted after its applicable conformity date.
The Franchise Tax Board has previously confirmed that California generally did not conform to the federal wildfire relief payment exclusion enacted in December 2024.
California has, however, enacted specific exclusions for certain wildfire settlements and relief payments.
These include exclusions under California Revenue and Taxation Code provisions addressing certain wildfire settlements, including Section 17138.7 and other specified wildfire relief provisions.
Consequently, a payment excluded from federal income under Section 139M should not automatically be excluded from California taxable income without a separate state law analysis.
For a broader discussion of how federal tax changes interact with California law, see my article on California tax conformity and federal tax legislation.
California Has Its Own Disaster Loss Deduction Rules
The California Franchise Tax Board also provides disaster loss deductions under state law.
For qualifying California disasters, state rules may allow deductions for losses resulting from disasters declared by the President or the Governor of California.
California Revenue and Taxation Code Section 17207.14 provides specific rules for certain declared disaster losses.
The FTB states that qualifying California disaster losses can generally be claimed in the year of the loss or, when the applicable requirements are met, in the preceding taxable year.
Because federal and California law can differ in determining the allowable deduction, applicable limits, and income exclusions, taxpayers should calculate the federal and California results separately.
The federal treatment should not simply be carried over to the state return without confirming California conformity.
The New Law Also Changes the Interaction With Earlier Disaster Relief Legislation
Section 2 of Public Law 119-108 provides coordination rules for earlier federal disaster relief provisions.
For taxable years beginning after December 31, 2024, the law generally replaces the application of the qualified disaster loss provisions in Section 304(b) of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 and Section 70438 of Public Law 119-21.
This matters because taxpayers may encounter different definitions and eligibility periods when reviewing older disaster guidance.
The new law should be considered together with the underlying Section 165 requirements and current filing guidance rather than assuming that every limitation appearing in an earlier disaster relief provision remains applicable.
For additional context on recent federal tax legislation and its effective dates, see my guide to federal tax law effective dates.
What Should Taxpayers Do After a Major Disaster?
The federal tax consequences should be evaluated while records remain available and before important election deadlines expire.
For taxpayers with disaster losses or wildfire settlement payments, the following issues deserve attention:
- Confirm disaster eligibility. Determine whether the event satisfies the federal requirements for a qualified disaster or qualified wildfire disaster.
- Calculate the actual economic loss. Establish adjusted basis, the applicable decline in fair market value, and the amount of insurance or other reimbursement.
- Review the year of deduction. Determine whether a Section 165(i) election to claim the loss in the preceding year provides a better result.
- Evaluate settlement payments. Determine which amounts qualify for Section 139M treatment and whether other tax provisions govern particular payment components.
- Prepare separate state calculations. Review California conformity or the applicable law of another state.
- Preserve documentation. Retain insurance records, property basis calculations, appraisals, settlement agreements, and disaster declarations.
The consequences can extend beyond the immediate tax year. Property basis, future settlement payments, amended returns, and the interaction between federal and state law can affect the taxpayer's position long after the disaster.
Final Takeaway
Public Law 119-108 provides meaningful federal tax relief for qualifying disaster victims.
The casualty loss provisions allow certain taxpayers to deduct qualified disaster losses without the normal 10% AGI limitation and without otherwise itemizing deductions.
The new Section 139M exclusion can also prevent qualifying wildfire relief payments received beginning in 2026 from being included in federal taxable income.
However, the two provisions have different eligibility requirements and effective dates. California conformity is not automatic, and settlement allocations, insurance recoveries, property basis, and election deadlines remain important.
For taxpayers who sustained a qualifying loss during 2025, the potential October 15, 2026, deadline for electing to deduct the loss on the 2024 federal return makes prompt review particularly important.
