Congress extended disaster tax relief. Which returns deserve a second look?
If your clients suffered disaster losses or expect wildfire settlements, their returns deserve a second look.
Processing Content
Picture two clients. One took the standard deduction in a disaster year and assumed that closed the door on a casualty loss. It may not have. The other is expecting a 2026 check for a wildfire that burned years ago. The Doug LaMalfa Federal Disaster Tax Relief Certainty Act can
Sept. 11, 2026 was the signing date, but that’s not the date that matters. Casualty-loss relief reaches tax years beginning after 2024. The new section 139M wildfire exclusion is narrower: only payments received in tax years beginning after 2025. Lock those two dates in before anything else, because every downstream question in the review hangs on them.
For calendar-year clients, the practical split is this: 2025 returns already on file may be amendable under the casualty-loss rules, while section 139M doesn’t kick in until 2026 receipts. An old fire can still support a current-year exclusion. What it can’t do is drag a payment received in an earlier year into the new provision. The receipt year controls.
Boiled down, every client review asks the same three things. Which rule applies? What’s the uncompensated loss or qualifying payment? And is the filing window still open?
The standard deduction doesn’t block relief
Here’s the headline change: the new section 165(h)(6) provides enhanced treatment for a “qualified net disaster loss” that even standard-deduction filers can claim, through section 63(b)(8). The 10%-of-AGI floor is removed for that net loss, while the per-casualty reduction becomes $500 instead of the usual $100. These are personal-use property rules; business and investment losses require their own analysis.
Not every disaster counts. The loss must arise in an area covered by a presidential major-disaster declaration under Stafford Act section 401. The FEMA incident period must begin on or after Dec. 28, 2019, and before Jan. 1, 2027. The loss must arise on or after the first day of that period and be attributable to the disaster. A state-only declaration does not satisfy this enhanced-relief test.
Keep the other casualty-loss rules separate. An otherwise deductible federal disaster loss outside the enhanced regime generally remains subject to the $100 reduction and the 10%-of-AGI floor on the net loss, with itemizing ordinarily required. A personal casualty loss outside the disaster rules is generally nondeductible, except to the extent of personal casualty gains under section 165(h)(5)(B). Don’t write off that exception.
For tax years beginning after 2025, section 165(h)(5) also covers certain state-declared disasters. That requires the statutory determination by both the governor or D.C. mayor, and the Treasury Secretary. A governor’s declaration alone is not enough. And qualifying under that provision does not, by itself, unlock the enhanced $500 and no-AGI-floor treatment.
Take the classic case: a client bears an unreimbursed loss in a qualifying 2025 storm, files with the standard deduction and skips the casualty loss because itemizing looked mandatory. That return deserves another look. Once you verify the amount and timing, the standard deduction is no barrier to the claim.
Get the loss amount and timing right
The amount still has to be computed properly. For personal-use property, start with the lesser of adjusted basis or the drop in fair market value, then account for insurance and other reimbursements received or reasonably expected. Replacement cost alone is not the ordinary measure of a casualty loss.
But don’t overlook the safe harbors in
Assemble the file as if an examiner will read it: basis records, valuation support, and a clean reconciliation of every insurance and assistance payment. Before you compute the qualified net disaster loss, net out any personal casualty gains in the order the statute prescribes. And remember the $500 reduction applies per casualty, not per damaged item.
There is an insurance-claim trap, too. Section 165(h)(4)(E) requires a timely claim for the portion of a loss covered by insurance. Skipping the claim does not convert available coverage into a deductible loss. But amounts the policy does not cover, such as a deductible, are not barred by that claim-filing requirement.
Watch the timing. A reasonable prospect of recovery generally postpones the deduction for the portion that may be reimbursed, not necessarily the entire loss. A clearly unrecoverable portion may be deductible earlier. The year of the storm and the year of the deduction therefore may differ under Treas. Reg. section 1.165-1(d).
An older wildfire can produce a later exclusion
Then there’s the wildfire side. Section 139M excludes qualified wildfire relief payments received by or on behalf of an individual as compensation for losses, expenses or damages from a qualifying wildfire disaster. That umbrella includes additional living expenses, certain lost wages, personal injury, death and emotional distress.
But it’s not double recovery. The exclusion reaches only losses, expenses or damages not otherwise compensated by insurance or another source. And the lost-wages category excludes compensation paid by the employer that would otherwise have paid those wages.
The disaster-date test here is its own animal. For section 139M, the federal disaster must have been declared after Dec. 31, 2014, and before Jan. 1, 2027, as a result of a forest or range fire. That is a declaration-date test, unlike the casualty provision’s incident-period test. The enacted section sets no ending year for receipt of qualifying payments.
Say a calendar-year client gets a settlement in 2026 for a qualifying wildfire from years back. The age of the fire does not, by itself, prevent exclusion. Verify the declaration, the receipt year and what the settlement actually compensates.
Don’t assume that every dollar in a wildfire settlement qualifies. Break out interest, punitive damages and legal fees for separate treatment, and confirm exactly which taxpayer is entitled to the recovery. Section 139M is written for individuals. A payment landing in an estate or another entity is a separate analysis. An unallocated lump sum should send you deeper into the settlement documents. It is not a license to exclude the entire check.
A payment received in 2025 requires a different analysis. The Federal Disaster Tax Relief Act of 2023 got there first: It already excludes qualifying wildfire relief payments received in tax years beginning after 2019 and before 2026. Resist the urge to force a 2025 payment into section 139M merely because the underlying fire clears the disaster-date test.
Section 139M also bites on the back end. An expenditure covered by an excluded payment generates no deduction or credit, and an excluded amount adds nothing to the property’s basis. Line up the settlement agreement, payment statements, insurance records and prior returns before you call any recovery tax-free.
Review the return, mind the filing deadline
This is the spot that trips practitioners up. The casualty provision’s disaster window stretches back to Dec. 28, 2019, yet the effective date hasn’t budged: tax years beginning after 2024. The early window doesn’t crack open every return filed since 2019. For 2020-through-2024 returns, work under the law that governed that year and check how much refund period is left. For tax years beginning after 2024, the Act displaces the specified earlier temporary casualty-loss provisions. The two regimes don’t stack.
If I were triaging, I’d start with 2025 clients who reported substantial disaster damage, skipped a loss because they took the standard deduction, or had insurance claims muddying the amount or timing. Gather the FEMA declaration and incident dates, the filed return, the Form 4684 workpapers and the loss documentation. On wildfire recoveries, nail down the receipt year and precisely what each payment covered.
Check the section 165(i) preceding-year election, and check it now. Take a calendar-year individual with an eligible 2025 disaster loss and an ordinary April 15, 2026 due date: The election is generally due Oct. 15, 2026, and the ordinary revocation deadline is Jan. 13, 2027. Confirm whether any disaster postponement applies before you lock in the client’s deadline.
Electing recharacterizes the loss as sustained in the preceding year. Moving a 2025 loss to 2024 can therefore change which relief regime applies. Compare both years before electing. Use the required election statement with the original or amended preceding-year return; Form 4684, Section D, provides the mechanism. If the loss was already deducted in the disaster year, remove it by amendment on or before making the election. You cannot deduct it twice.
Before filing a refund claim, check both the section 6511 filing deadline and the lookback limit on the amount recoverable. The filing period generally runs three years from filing the return or two years from paying the tax, whichever expires later. This Act creates no fresh refund-claim period. Separately, the Disaster Related Extension of Deadlines Act treats a section 7508A return-filing postponement as an extension for the three-year refund lookback, for claims filed after Dec. 26, 2025.
Earlier wildfire-exclusion claims have an important exception. The 2024 law kept their filing period open at least through Dec. 12, 2025, and separately waived the section 6511(b)(2) lookback limits. After that date, a claim still needs to be timely under section 6511(a), but the lookback waiver continues for a timely claim properly allocable to that earlier exclusion. The IRS expressly confirms this distinction. Don’t discard a potentially valid claim by applying the ordinary lookback automatically.
One last discipline: Cross-check the IRS instructions against the enacted statute itself. As of Sept. 29, 2026, the 2025 Form 4684 instructions and Publication 547 still reflect the earlier disaster windows. Before filing, check their future-developments pages and your software’s implementation. An outdated cutoff in the instructions doesn’t override the new law.
Congress has genuinely widened what’s available to disaster victims. Even so, each client’s benefit still hinges on four things: a qualifying disaster, the right tax year, the uncompensated loss or payment, and a workable procedure to claim it. Nail those facts down before you estimate a refund. A valuable deduction or exclusion dies quietly when the review stops at the disaster date.
