New Federal Act Offers Tax Relief for Wildfire Survivors

A new law signed in September 2026 provides important tax relief for individuals affected by wildfires, particularly those impacted by the Eaton Fire. The Doug LaMalfa Federal Disaster Tax Relief Certainty Act, officially H.R. 5366, ensures that certain wildfire relief payments are not counted as federal gross income. This change offers a financial cushion to survivors as they work to rebuild their lives and properties.

The act specifically addresses compensation received for losses related to federally declared wildfire disasters. This includes a range of damages, such as harm to homes, personal belongings, additional living expenses, lost wages, and even compensation for personal injury, death, or emotional distress. A key condition is that these payments must not have already been covered by insurance or another source.

Understanding the Tax Exclusion

The primary benefit of the Doug LaMalfa Federal Disaster Tax Relief Certainty Act is its ability to exclude qualified wildfire relief payments from federal gross income. This means survivors can keep more of the money they receive to help with recovery efforts. The law applies to payments received in taxable years beginning after December 31, 2025, and covers compensation tied to federally declared wildfire disasters that occurred before January 1, 2027.

This extended timeline is significant because the previous wildfire tax exclusion expired at the end of 2025. The new act ensures that payments made after this date, provided they meet the law’s requirements, can still benefit from the tax-free status. This is a crucial update for those who may receive compensation later in their recovery process.

What Types of Compensation Are Covered?

The act is designed to be broad in its scope, recognizing the many ways wildfire disasters can impact individuals and families. Eligible compensation can include payments for:

• Real property loss or damage: This covers damage to homes and other structures.
• Personal property loss or damage: This includes damage to belongings like furniture, electronics, and clothing.
• Additional living expenses: Costs incurred when a home is uninhabitable, such as hotel stays or temporary rentals.
• Lost wages: Income lost due to being unable to work after the disaster.
• Personal injury, death, and emotional distress: Compensation related to physical harm, loss of life, or psychological impact.

It is important to remember that the compensation must represent a loss or expense that has not been reimbursed by another source, such as insurance. The law does not automatically make every wildfire-related payment tax-free; its application depends on the nature of the compensation and whether the loss has already been covered.

Broader Disaster-Loss Deductions Also Extended

Beyond the exclusion for specific relief payments, H.R. 5366 also enhances provisions for casualty losses and disaster-related deductions. These changes apply to taxable years beginning after December 31, 2024. For qualified disaster losses, the law removes the requirement that losses must exceed 10% of a taxpayer’s adjusted gross income to be deductible, through the end of 2026. Additionally, the per-event threshold for these deductions is increased from $100 to $500.

These deductions operate separately from the gross income exclusion for settlement payments. This means that a compensation payment and a casualty-loss deduction will require separate analysis for tax purposes. The bipartisan support for this measure highlights its importance in helping communities recover from devastating wildfires.

Eaton Recovery Efforts and Record Keeping

The Eaton Fire, which occurred in January 2025, significantly impacted communities including Altadena and Pasadena. Southern California Edison’s Wildfire Recovery Compensation Program has been a part of the recovery, with payments exceeding $410 million as of September 2026. The new federal law ensures that a portion of these and other qualifying payments can be received without federal income tax implications.

Survivors are encouraged to keep detailed records of their losses and any compensation received. Documentation showing what a payment covers and whether a loss has been compensated by another source will be essential for determining eligibility under the new federal rule. This careful record-keeping can help ensure that individuals receive the full tax benefits available to them.

Frequently Asked Questions