Natural disasters can create devastating financial losses. Homes may be damaged or destroyed, personal belongings may be lost, and families may receive insurance proceeds, settlement payments, or other forms of assistance. Tax rules can affect both the losses taxpayers claim and the treatment of disaster-related payments they receive.

The Doug LaMalfa Federal Disaster Tax Relief Certainty Act, was signed into law on September 11, 2026, and addresses two significant areas of disaster tax relief. First, it establishes special rules for personal casualty losses resulting from certain federally declared major disasters. Second, it excludes certain payments related to qualifying wildfires from an individual’s gross income.

The legislation is designed to provide more certainty by placing disaster-relief rules directly into the Internal Revenue Code rather than relying solely on temporary provisions enacted after individual disasters.

Special Treatment for Qualified Disaster Losses

Under the new law, an individual who has a qualified net disaster loss may qualify for special tax treatment. In general, this occurs when qualified disaster-related personal casualty losses exceed personal casualty gains, after taking into account the portion of gains required under the casualty-loss rules.

A personal casualty loss may result from damage to or destruction of personal-use property, such as a home, vehicle, furniture, clothing, or other personal belongings. However, not every casualty loss qualifies for the special disaster rules. The loss must meet several requirements. Primarily, it must arise in a qualified disaster area, occur on or after the first day of the disaster’s incident period, and be attributable to the declared disaster.

What is a Qualified Disaster Area?

It is defined as an area for which the President has declared a major disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. The disaster’s incident period must begin on or after December 28, 2019, and before January 1, 2027. The incident period is the period specified by the Federal Emergency Management Agency, or FEMA, during which the disaster occurred.

This means that the taxpayer must connect the loss to a specific federally declared disaster. A loss that happens in a disaster-designated state or county may not qualify unless the property is located in the declared area and the loss occurred during the relevant incident period or otherwise satisfies the statutory requirements.

The Per-Event and 10% of AGI Reduction Rules

When determining if a casualty loss may be deductible, a general rule requires that a casualty loss be reduced by $100 per casualty or theft event and 10% of adjusted gross income (AGI). However, for qualified disaster-related losses, special treatment makes the per-event amount $500 and removes the 10% of AGI reduction requirement.

Taxpayers should retain evidence showing the condition and value of the property before the disaster, the extent of the damage afterward, the cost of repairs or replacement, and the amount of insurance or other reimbursement received. IRS Form 4684, Casualties and Thefts, is generally used for reporting qualified disaster losses.

The Act provides special treatment for the qualified net disaster loss before applying the remaining portion of the casualty-loss limitation. In general, the qualified net disaster loss is included in the special calculation, while the excess of other casualty losses over casualty gains remains subject to the AGI limitation.

This distinction can be important for taxpayers who experienced both disaster-related and non-disaster casualty losses during the same year. The taxpayer should not simply combine every personal loss and treat the entire amount as a qualified disaster loss. Instead, the losses and gains must be classified and calculated separately.

Insurance proceeds and other reimbursements also matter. A casualty loss generally cannot be claimed to the extent the taxpayer has been reimbursed or has a reasonable prospect of reimbursement. A taxpayer who receives insurance proceeds after filing a return may need to account for the reimbursement in a later year.

Disaster Losses for Taxpayers Who Use the Standard Deduction

One of the most significant provisions of the new law permits the portion of a deduction attributable to a qualified net disaster loss to be claimed by an individual who does not itemize deductions.

Ordinarily, deductions for personal casualty losses are associated with itemized deductions. Under the Act, however, an individual may claim the qualified net disaster loss even while using the standard deduction. This rule can benefit taxpayers who do not have enough other itemized deductions to exceed the standard deduction.

The special rule does not mean that every casualty loss becomes available to a taxpayer using the standard deduction. The benefit only applies to the portion of the deduction attributable to the qualified net disaster loss.

The calculation should show:

• The total personal casualty losses;
  
  
• The losses specifically attributable to the qualified disaster;
  
  
• Personal casualty gains;
  
  
• Insurance proceeds and other reimbursements;
  
  
• The $500 per-event reduction;
  
  
• The qualified net disaster loss; and
  
  
• Any remaining casualty loss subject to the AGI limitation.

Exclusion for Qualified Wildfire Relief Payments

The Act also creates new Internal Revenue Code section 139M. This provision excludes qualified wildfire relief payments from an individual’s gross income.

A qualified wildfire relief payment is an amount received by or on behalf of an individual as compensation for losses, expenses, or damages resulting from a qualified wildfire disaster. Eligible categories may include additional living expenses, certain lost wages, personal injury, death, or emotional distress.

The new law specifically limits the exclusion to the extent that the losses, expenses, or damages compensated by the payment have not already been compensated by insurance or otherwise. This prevents a double recovery for the same economic loss.The exclusion covers certain lost-wage compensation, but it does not generally cover lost-wage payments made by the employer that would have otherwise paid the wages.

Taxpayers should review the settlement documents and payment records carefully to determine whether a payment represents excluded disaster compensation, taxable wages, or another category of income.

A taxpayer who included an otherwise qualifying wildfire relief payment in federal gross income, should consider filing an amended return for the affected payment year.Generally, a refund claim must be filed within three years from the date the original return was filed or two years from the date the tax was paid, whichever is later. Federal amendments are done using IRS Form 1040-X.

What Is a Qualified Wildfire Disaster?

The Act defines a qualified wildfire disaster as a federally declared disaster resulting from a forest or range fire. The declaration must occur after December 31, 2014, and before January 1, 2027.

The payment must be connected to the qualifying wildfire disaster. A general payment received by a person who happens to live in a wildfire-affected region may not qualify unless the payment is compensation for a loss, expense, or damage resulting from the federally declared disaster.

Taxpayers should keep copies of settlement agreements, claim forms, payment statements, insurance records, and correspondence describing the purpose of the payment. The language used by an insurer, governmental agency, utility, employer, or settlement administrator may help determine whether the payment is compensation for a qualifying loss.

No Double Benefit for Excluded Wildfire Payments

The Act contains an important no-double-benefit rule.

If a taxpayer excludes a qualified wildfire relief payment from income, the taxpayer generally cannot also claim a deduction or credit for an expenditure to the extent that the expenditure was compensated by the excluded payment.

The Act also provides that an excluded wildfire relief payment does not increase the taxpayer’s basis in property. Basis is generally used to calculate gain or loss when property is later sold or otherwise disposed of. If a taxpayer uses an excluded payment to restore or improve property, the excluded amount does not automatically increase the property’s adjusted basis under this rule.

Taxpayers should therefore track how relief payments are used and keep records connecting payments to the expenses, property, or losses they compensate.

Effective Dates

The casualty-loss amendments apply to taxable years beginning after December 31, 2024. This generally means they apply beginning with the 2025 tax year for calendar-year individual taxpayers.

The wildfire-payment exclusion applies to payments received in taxable years beginning after December 31, 2025. For a calendar-year taxpayer, this generally means payments received during 2026 and later years, assuming the other requirements are met.

The Act also provides coordination rules stating that certain earlier temporary provisions will not apply to taxable years beginning after December 31, 2024. Taxpayers with disaster losses from prior years should not assume that the rules are identical from one disaster to another. The applicable disaster declaration, tax year, payment date, and statutory provision must all be reviewed.

Federal and State Tax Treatment May Differ

The Act concerns federal income tax. States may not automatically conform to every federal provision.

Taxpayers who live in Oregon, California, or another state with its own disaster rules should consult state instructions or a tax professional before assuming that federal treatment applies on the state return.

Practical Steps for Taxpayers

Taxpayers affected by a qualifying disaster should take several practical steps:

1. Confirm that the disaster was federally declared and identify the applicable incident period.
   
   
2. Determine whether the property and loss were located within the qualified disaster area.
   
   
3. Separate disaster-related losses from unrelated casualty or theft losses.
   
   
4. Reduce losses by insurance proceeds and other reimbursements.
   
   
5. Keep records supporting the property’s value before and after the disaster.
   
   
6. Preserve receipts for repairs, replacement property, temporary housing, and other expenses.
   
   
7. Review the purpose of any settlement or relief payment.
   
   
8. Avoid claiming a deduction for an expense reimbursed by a tax-free payment.
   
   
9. Determine whether the payment affects the basis of property.
   
   
10. Check state conformity rules separately.

The Federal Disaster Tax Relief Certainty Act provides important relief for individuals affected by qualifying disasters and wildfires. Its benefits, however, depend on meeting detailed eligibility requirements and maintaining adequate documentation. Taxpayers should identify the specific disaster, classify each loss or payment correctly, and review both federal and state treatment before filing.

If you have questions about how the Certainty Act may apply to your situation, please contact this office.