The Federal Disaster Tax Relief Act (“the Act”) signed into law by President Biden in December, extends critical natural disaster tax relief. This legislation, which builds upon previous disaster relief measures such as the Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the Federal Disaster Tax Relief Act of 2023, offers enhanced benefits to those impacted by events such as wildfires, hurricanes, and other severe weather incidents. By extending and modifying existing relief measures, lawmakers aim to ensure that the relief remains relevant and effective in addressing the needs of disaster victims over time and allows timely support to those affected by new disasters.
Qualified Disaster Designation & Timeline
The Act designates all presidentially declared disasters from January 1, 2020, to February 10, 2025, as “qualified” disasters. Importantly, the actual disaster incident date must be on or before December 12, 2024, and thus the recent 2025 California wildfires are unfortunately not included in this specific extension of relief.
Casualty Loss Deductions Without Itemization
Taxpayers affected by any qualified disasters may claim deductions for losses incurred during these events. Importantly, those taxpayers may claim the loss without the need to itemize deductions. Additionally, the Act removes the requirement that casualty losses must exceed 10% of an individual’s adjusted gross income threshold that previously applied to casualty loss deductions. This change will make it easier for taxpayers to benefit from these provisions.
Determining the Casualty Loss Amount
The deduction amount is generally based on the value of the loss, not necessarily the monetary amount spent on repairs. To determine the loss amount, taxpayers must identify the lesser of either the decrease in the fair market value of the property due or the property’s adjusted basis (typically purchase price plus improvements), and then subtract from that amount any insurance or other disaster-related reimbursements received. Lastly, the Act establishes a $500 casualty loss floor, allowing a deduction for losses exceeding that amount.
Amending Past Tax Returns for Loss Deductions
To benefit from this relief, taxpayers who have already filed their returns for 2021, 2022, or 2023 can amend those returns to claim the loss deductions related to the qualified disasters from those years. Of course, taxpayers can apply the same rules to claim losses for 2024 this year.
Simplified Documentation Requirements for Claims
The Act aims to encourage the use of this relief through fairly simple documentation requirements for claims, hopefully streamlining the actual claim process for this important new extension of disaster relief. While specific details on the simplified procedures are still forthcoming, the intent is to make the claims process more straightforward and less time-consuming. The lessening of required paperwork to claim a loss would be particularly beneficial for taxpayers who may have lost important documents in the disaster.
If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
