In welcome news for businesses and individuals affected by natural disasters, Congress has enacted the Federal Disaster Tax Relief Act of 2023, providing expanded tax relief opportunities that could benefit many of our clients. Signed into law at the end of December 2024, this nearly $5 billion legislation is crucial in that it not only extends disaster tax benefits through early 2025 but also applies retroactively to qualified disasters declared since December 2019.
For clients who have experienced losses from hurricanes, wildfires, or other natural disasters, this creates important opportunities to claim previously unavailable tax benefits, including amended returns for tax years 2021-2023.
Key Aspects and Modifications
As always, tax law is complicated. Here’s a breakdown of the main benefits that come with the new legislation:
- Itemization no longer required: Individuals and businesses now have a simpler way to deduct losses related to qualified disasters from their taxes. Traditionally, to deduct casualty losses, businesses had to itemize deductions and ensure that the losses exceeded 10% of their adjusted gross income (AGI). The new Act now permits the deductions of losses above $500 to be added to the standard deduction without having to itemize.
- Extended deadlines: Those in a federally declared disaster now receive an automatic extension for filing tax returns and making payments. For example, victims of the California wildfires now have until October 15, 2025, to file their personal and business returns. This extension offers taxpayers additional time to manage financial and administrative tasks during recovery and reduces the need for discretionary decisions by the IRS.
- Special credits and exemptions: Taxpayers are now able to exclude any qualified disaster relief payments from their gross income. This includes lost wages and payments for necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster as well as expenses for the repair or rehabilitation of a personal residence or its contents.
A Look at the Fine Print
The law defines “qualified disaster” as a disaster that has been federally declared by the President under the Robert T. Stafford Disaster Relief and Emergency Assistance Act between January 1, 2020, and January 11, 2025, provided they were declared as federal disasters by February 9, 2025.
This includes natural events such as hurricanes, wildfires, floods, and other significant incidents that received federal disaster declarations. For instance, the Act specifically addresses tax relief for losses due to wildfires and certain incidents like the East Palestine, Ohio, train derailment.
What it doesn’t include, however, is COVID-19. From the bill: “A qualified disaster area does not include any area with respect to which a major disaster had been declared only by reason of COVID-19.”
For those who incurred losses due to a natural disaster, these new provisions can help alleviate some of the financial burden and enable them to focus on patient care and rebuilding operations after a disaster.
As a reminder, the regular deadline for filing this year’s taxes, as well as any amended returns from 2021-2023, is April 15, 2025.
