Federal Disaster Tax Relief Act of 2023: What Taxpayers Need to Know
On December 12, 2024, President Biden signed into law the Federal Disaster Tax Relief Act of 2023, delivering long-awaited tax relief for individuals and businesses affected by federally declared disasters over the past several years. The legislation, which received broad bipartisan support, aims to ease the financial burden on taxpayers recovering from disasters by reinstating and expanding key tax provisions.
This comprehensive tax relief package retroactively covers disasters declared between January 1, 2020 and February 10, 2025 (60 days after the date of enactment)—a timeline that spans numerous hurricanes, wildfires, floods, and other catastrophes. Examples of major disasters included under the law are Hurricanes Milton, Ian, and Helene; wildfires in Hawaii and California; and the East Palestine, Ohio, train derailment.
Here’s a breakdown of the act’s most impactful provisions and how taxpayers can benefit:
Personal Casualty Loss Relief
One of the most significant provisions re-establishes an enhanced deduction for qualified disaster-related personal casualty losses. Typically, these losses are subject to a $100 floor per casualty and a 10% of adjusted gross income (AGI) threshold. Under the new law, these barriers are eliminated for qualified losses. Taxpayers can claim the full amount of eligible losses without regard to AGI limitations, and the per-event floor is $500.
Importantly, these deductions are available even for taxpayers who claim the standard deduction, a change that could greatly expand eligibility and tax savings.
Access to Retirement Funds
The Act reinstates favorable treatment for distributions from retirement accounts for disaster victims. Taxpayers affected by qualified disasters can:
Take up to $22,000 in disaster-related distributions from IRAs or workplace retirement plans without incurring the 10% early withdrawal penalty.
Elect to spread income tax liability on the distribution over three years.
Repay the distribution within three years to avoid permanent taxation.
This provision offers a critical lifeline for individuals who have exhausted emergency savings or face rebuilding costs.
Tax-Free Relief Payments for Victims of East Palestine, Ohio Train Derailment and Certain Wildfires
The Act acknowledged the need to provide relief to victims of wildfires and the train derailment in East Palestine, Ohio. Without this acknowledgment, any relief payments received by victims would be considered taxable for federal income tax purposes. The eligibility is different for each disaster.
Wildfire relief payments received as compensation for losses, expenses, damages, living expenses, lost wages, personal injury, death and emotional distress are tax-free when received during taxable years beginning after December 31, 2019, and before January 1, 2026. For calendar year taxpayers, this would be tax years 2020 – 2025.
East Palestine relief payments received as compensation for losses, expenses, damages, loss in real property value, closing costs with respect to real property (including realtor commissions), or inconvenience (including access to real property) are tax-free. Payments received on or after February 3, 2023, are eligible for tax-free treatment. Furthermore, only amounts received from the following entities qualify:
A Federal, State, or local government agency
Norfolk Southern Railway
Any subsidiary, insurer, or agent of Norfolk Southern Railway or any related person
Next Steps for Taxpayers and Businesses
The Federal Disaster Tax Relief Act of 2023 delivers long-overdue support to individuals and businesses impacted by natural and manmade disasters. Taxpayers should consult their tax advisors to determine eligibility and whether amending prior year returns could generate immediate refunds.
CSH tax professionals are available to help you navigate the complex provisions of the new law and ensure you maximize the relief available. Contact us today to get started.
