Disaster Tax Relief Law: Casualty Losses & Wildfire Pay

Congress has revived two disaster tax relief rules that had lapsed. The change matters directly to Coloradans still recovering from the Marshall Fire. President Trump signed H.R. 5366, the Doug LaMalfa Federal Disaster Tax Relief Certainty Act, on September 11, 2026, after the Senate passed it by unanimous consent.

The law does two things. It restores the more generous casualty loss deduction for federally declared major disasters through the end of 2026. It also makes qualified wildfire relief payments tax-free no matter when you receive them. Here is what changed, as of September 2026, and what to check on your 2025 and 2026 returns.

What Does the Disaster Tax Relief Certainty Act Change?

The disaster tax relief act makes two temporary rules permanent and extends their dates. Section 2 adds a qualified disaster loss rule to section 165(h) of the Internal Revenue Code. Section 3 adds a new section 139M, which excludes qualified wildfire relief payments from income. The casualty loss changes apply to tax years that began after December 31, 2024, so they reach your 2025 return.

Sources: H.R. 5366 on Congress.gov and the IRS wildfire relief and casualty loss FAQ.

Which Disasters Qualify for the Casualty Loss Relief?

Your loss qualifies if the President declared a major disaster for your area under the Stafford Act, and FEMA’s incident period for that disaster began between December 28, 2019, and December 31, 2026. The loss must arise on or after the first day of that incident period, and the disaster must have caused it.

The earlier version of this relief only covered incident periods that began by July 4, 2025, according to the IRS. The House Ways and Means Committee explained why that gap mattered.

“The expiration of this special rule for disasters after July 4, 2025, means fewer disaster victims are currently eligible for a deduction when they suffer disaster-related losses.” House Ways and Means Committee, H.R. 5366 summary

To confirm that your county is covered and find the incident period, check FEMA’s disaster declarations page.

How Much of a Disaster Loss Can You Deduct?

For a qualified disaster loss, you subtract $500 per casualty from your unreimbursed loss and deduct the rest. You do not reduce it by 10% of your income, and you do not need to itemize. Other federally declared disaster losses work differently. The floor is $100 per casualty, the total must also exceed 10% of your adjusted gross income, and you must itemize.

Consider a household with $120,000 of adjusted gross income and $45,000 of storm damage left after insurance:

1. Under the qualified disaster rule, $45,000 minus the $500 floor leaves a $44,500 deduction on top of the standard deduction.
2. Under the regular rule, $45,000 minus $100, minus $12,000 (10% of $120,000), leaves $32,900, and only if you itemize.
3. The qualified rule gives you $11,600 more in deductions, and you keep your standard deduction.

Because the loss comes from a federally declared disaster, you may be able to claim it on the prior year’s return, which can speed up a refund. The deduction cannot exceed the smaller of the drop in your property’s value or your adjusted basis. Keep photos, repair estimates, insurance letters, and purchase records.

Are Wildfire Relief Payments Taxable?

No. Under the new law, qualified wildfire relief payments are tax-free whenever you receive them, as long as the fire was declared a federal disaster after December 31, 2014, and before January 1, 2027. This closes a real gap. The old rule only excluded payments received by December 31, 2025, yet settlements often take years to pay out.

A qualified payment compensates you for losses, expenses, or damages from the fire. That includes extra living expenses, lost wages your employer did not pay, personal injury, death, and emotional distress. The exclusion only covers losses that insurance or another source has not already paid.

“You cannot take a credit or deduction, or increase the basis in your property, related to any expense for which you received a qualified wildfire relief payment.” Internal Revenue Service, Wildfire Relief Payments and Casualty Losses FAQ

New section 139M keeps this no-double-benefit rule. It applies to payments received in tax years that began after December 31, 2025.

What Does the New Law Mean for Marshall Fire Survivors?

For Marshall Fire survivors, settlement payments received in 2026 or later can now stay out of federal income, to the extent they cover losses insurance did not. FEMA declared the Marshall Fire a major disaster on December 31, 2021, as FEMA-4634-DR, so it falls inside the 2015 to 2026 window.

The timing matters. In September 2025, Xcel Energy agreed to pay $640 million to settle Marshall Fire claims from more than 4,000 plaintiffs. The Colorado Sun reported that survivors who received payments after the old exclusion expired could owe tax on them. Colorado Representatives Joe Neguse and Jason Crow cosponsored the bill.

Colorado starts its income tax calculation from federal taxable income. A payment you exclude federally therefore generally stays out of your Colorado taxable income too. Confirm the treatment on your own return, especially if part of a settlement covers items your insurer also paid.

What This Means for You

If a federally declared disaster damaged your property since late 2019, check whether your 2025 return left out a casualty loss. The expanded rule now reaches tax years that began after December 31, 2024. If you received or expect a wildfire settlement, the exclusion likely applies. Still, the insurance offset and the ban on raising your property’s basis can change the numbers for a rebuild or a later sale.

Next Steps

1. Confirm the FEMA declaration number and incident period for your disaster.
2. Gather insurance statements, settlement agreements, and repair or replacement records.
3. Ask whether you should amend your 2025 return to claim a qualified disaster loss.
4. For a wildfire settlement, set aside the portions that cover items insurance already paid, and track the basis of any rebuilt property.

Contact Us

Disaster recovery is hard enough without a surprise tax bill. Steve Barkmeier, CPA, and our tax team can review your settlement, your casualty loss, and any amended return with you. Learn more about our individual tax planning and compliance, or our IRS and state representation if you have received a notice. You can also email us at info@whipplewood.com.