Experiencing a disaster whether it’s a wildfire, hurricane, flood, or another unexpected event can be absolutely devastating. Beyond the emotional toll, the financial impact can feel overwhelming too. Thankfully, there is some relief available through the federal tax system that may help ease the burden, at least a little.

If your personal property (think your home, car, or belongings) was damaged or destroyed in a federally declared disaster, you might be eligible to deduct those losses from your taxable income. That said, the rules are complex and can be difficult to navigate, especially when you are already trying to recover and rebuild.

Let’s walk through what this tax relief looks like, how the rules have recently changed, and what it means for you if you have suffered a qualifying loss.

First Things First: What Counts as a Deductible Loss?

Not every unfortunate event will qualify for a tax deduction. Under federal law, only losses from federally declared disasters are deductible on your tax return. That means the President of the United States must officially declare the event a federal disaster.

For example, if a wildfire sweeps through your town and the area is declared a federal disaster zone, you may be eligible for tax relief. On the other hand, if your home is damaged due to something like a faulty fireplace or a localized house fire, those types of personal losses are not tax deductible.

So the first step is to check whether the disaster was federally declared. The IRS and FEMA websites typically keep updated lists of all qualifying disaster zones.

Insurance Matters: You Can Only Deduct Unreimbursed Losses

If your property was insured, things get a bit more nuanced. The IRS only allows you to deduct unreimbursed losses. In other words, if insurance covered part (or all) of the damage, you can only deduct the part of the loss that was not paid by insurance.

Also important: If your loss is covered by insurance, the IRS requires you to file a claim, even if you are worried that doing so could increase your premiums or lead to policy issues. Ignoring this step could disqualify you from claiming the deduction.

There is one notable exception here. Business owners are not required to file an insurance claim to deduct a business-related casualty loss. That’s a different set of rules.

Calculating the Amount of Your Loss

Calculating your disaster loss for tax purposes involves a few steps, and unfortunately, it’s not always straightforward.

Here’s how it works:

1. First, determine the smaller of the following: 
   • The decline in the property’s fair market value due to the disaster 
   • The property’s adjusted basis, which is usually what you paid for it originally 
2. Then subtract any reimbursement you received, such as from insurance. 

You can estimate the decrease in fair market value by using either a qualified appraisal or the cost to repair the damage. Make sure you have documentation to support whatever method you use.

What’s Changed? Relief Under the Federal Disaster Relief Act of 2023

Thanks to recent legislation, there is now expanded tax relief available for many people affected by major disasters over the last few years.

In December 2024, Congress passed the Federal Disaster Relief Act of 2023, which made important changes for disaster losses occurring between January 1, 2020, and January 11, 2025.

Here’s what’s different under the new law:

• Instead of the old $100 floor and 10 percent of adjusted gross income (AGI) threshold, you now only have a $500 minimum loss requirement. 
• You do not have to itemize your deductions to claim the loss. 
• You can increase your standard deduction by the amount of your net disaster loss. 

This is a huge benefit for taxpayers who do not typically itemize, and it makes disaster loss deductions far more accessible for the average person.

 

You Might Be Able to Amend Past Tax Returns

One other detail that is easy to miss. If you suffered a qualifying disaster loss between January 2020 and now and you didn’t claim a deduction because you didn’t qualify under the old rules,  you may now be eligible for a refund.

That means you can go back and file an amended return for those years using the new rules. This includes losses from events like major wildfires and the East Palestine train derailment.

In some cases, you may also be able to exclude certain disaster relief payments you received from your taxable income.

Let’s Talk About Your Situation

Disasters are hard enough. Navigating the tax rules afterward shouldn’t add to the stress.

If you think you might qualify for a disaster loss deduction or if you are unsure whether your loss meets the requirements, I’m here to help. The details matter, and every case is unique.

Call me directly at 480 355-1398 and we can walk through the specifics together. Whether it’s for a past loss or a more recent disaster, let’s make sure you are taking advantage of every bit of tax relief available to you.