New Disaster Tax Law Drops Casualty Loss Threshold to $50, Makes Wildfire Relief Tax-Free Through 2030

The Federal Disaster Tax Relief Act of 2025 is a temporary but significant change to how the federal government handles the financial fallout from natural disasters. Essentially, it temporarily rewrites the tax code to make it much easier for people to get a tax break after a major disaster or a wildfire, but only for disasters declared between July 4, 2025, and January 1, 2027.

Cutting the Red Tape on Casualty Losses

If you’ve ever had to claim a loss on your taxes after a hurricane or flood, you know the current rules are brutal. Right now, you can only start deducting personal casualty losses after they exceed $500, and then only the amount that is more than 10% of your Adjusted Gross Income (AGI). This bill changes both of those hurdles for anyone affected by a federally declared major disaster during the specified period.

First, the bill slashes the initial threshold from $500 down to just $50 (Sec. 2). That means if a storm causes $100 in damage to your home not covered by insurance, you can deduct $50 of it, instead of zero. Second, and much more importantly for people with significant damage, it completely waives the 10% AGI requirement for these “qualified net disaster losses.” This provision allows taxpayers to deduct the full amount of their disaster losses against their income, even if they take the standard deduction. For a family earning $80,000 who loses $25,000 in property, this change means a substantially larger deduction, providing real financial relief much faster.

Wildfire Relief Becomes Tax-Free Income

The bill also addresses a major pain point for victims of large-scale wildfires: the taxability of relief payments. Historically, money received from certain relief funds to cover losses, expenses, or lost wages—if not covered by insurance—could be counted as taxable income. This bill creates a new exclusion, making “qualified wildfire relief payments” completely tax-free (Sec. 3).

This exclusion applies to payments received during tax years starting after December 31, 2025, and ending before January 1, 2031, provided the loss was caused by a fire that was a Federally declared disaster after 2014. For instance, if you received $10,000 from a state relief fund to cover temporary housing and lost wages after a wildfire, that money is now clean—you don’t have to worry about paying taxes on it come April. The bill does, however, prevent a double-dip: if you exclude the payment from income, you can’t also claim a deduction or credit for that same expense.

What This Means on the Ground

This legislation is a clear win for people in disaster-prone areas, especially those who suffer moderate but uninsured losses. By dropping the loss floor to $50, it acknowledges that even small, cumulative losses can hurt. More critically, by allowing disaster losses to be deducted without the onerous 10% AGI limit, it ensures that the tax code doesn't penalize middle-income families who are already struggling to rebuild. The biggest catch here is the expiration date: the most generous loss provisions only apply to disasters declared within a roughly 18-month window (mid-2025 to early 2027), meaning future disaster victims might be back to the old, stricter rules.