New Disaster Tax Act Extends Relief: Casualty Loss Deductions Eased for 2025-2027 Disasters, Wildfire Payouts Tax-Free Through 2030

The Federal Disaster Tax Relief Act of 2025 is essentially a tax code update designed to give people a break when disaster strikes. It does two main things: first, it makes it easier to deduct casualty losses from major disasters that happen over the next couple of years; and second, it makes certain compensation payments received for past wildfire losses tax-free for the next few years.

The New Math on Casualty Losses

When you suffer a major loss—say, your house is damaged in a hurricane or earthquake—you can often deduct that loss on your taxes. The catch? Under normal rules, you can only deduct the portion of the loss that exceeds 10% of your Adjusted Gross Income (AGI). For most people, that 10% threshold makes claiming a deduction nearly impossible unless the damage is catastrophic. This bill creates a special, more favorable rule for “qualified net disaster losses” resulting from any major disaster declared between July 4, 2025, and January 1, 2027 (Sec. 2).

If you live in one of these federally declared disaster areas and suffer a loss, this bill lets you bypass that harsh 10% AGI hurdle for the disaster-related portion of your loss. Essentially, it allows you to deduct the full amount of your qualified net disaster loss. For a family with a $100,000 AGI who suffers $40,000 in uninsured damage, this change is huge. Instead of deducting maybe a few thousand dollars (or nothing at all), they can deduct the full $40,000 loss, offering real, immediate financial relief when they need it most.

Tax-Free Payouts for Wildfire Victims

The second major part of the bill is focused on victims of wildfires. It establishes a new section in the tax code (Section 139M) that excludes “qualified wildfire relief payments” from an individual’s gross income. This means if you received money as compensation for losses, lost wages, or additional living expenses due to a qualified wildfire (defined as a federally declared disaster caused by a forest or range fire after December 31, 2014), that money won't be taxed (Sec. 3).

This is particularly helpful for people who received large settlement payouts related to past catastrophic fires. If you received a $50,000 payment for damages, under this bill, you won’t have to worry about paying income tax on that amount. However, this exclusion only applies to payments received during tax years starting after December 31, 2025, and before January 1, 2031. So, if you received a payout last year, this provision doesn't help you, but if you receive one next year, it does.

No Double Dipping: The Practical Caveat

There’s a necessary catch included to keep things fair: you can’t double-dip. If you receive a tax-free wildfire relief payment for a loss, you cannot also claim a deduction or credit for that same loss on your taxes. For example, if your payment covered the cost of replacing your roof, you can’t then turn around and claim a casualty loss deduction for that same roof replacement (Sec. 3).

This is standard procedure, but it means taxpayers need to be careful when filing. If you’re receiving these tax-free payments, make sure you don't accidentally try to deduct the same expense, as the IRS will be looking out for that conflict. Overall, this bill is a win for disaster victims, offering concrete tax breaks when life throws a curveball, though the limited window for the casualty loss relief (mid-2025 to early 2027) means the benefit is temporary.