Guide to Tax Relief for California Wildfire Victims

Alert

January 27, 2025

If you are a resident or business affected by the California wildfires, understanding your tax relief options is an essential aspect of recovery efforts and navigating a path forward. This guide will help you navigate the tax relief measures available to individuals and businesses impacted by these devastating wildfires. On January 7, 2025, President Biden declared the California wildfires a major disaster, unlocking key tax benefits for those affected.

Tax Filing and Payment Deadlines Postponed

On January 10, 2025, the Internal Revenue Service (IRS) announced it is postponing tax-filing and tax-payment deadlines until October 15, 2025. This postponement covers tax filings and tax payments that would typically occur between January 7 and October 15, 2025.

For employers, the IRS will waive penalties for failing to make payroll and excise tax deposits that fall due on or after January 7 and before January 22, 2025, if all deposits are made by January 22, 2025. All individuals and businesses in Los Angeles County, California, qualify for this tax relief.

Casualty Loss Deductions for California Wildfire Victims

If your property was damaged or destroyed in the wildfires, you might be eligible for a casualty loss deduction. This deduction is calculated based on the lesser of your property's adjusted cost basis or its decline in fair market value due to the wildfires, minus any insurance recoveries. Normally, personal casualty losses in federally declared disaster areas are deductible only if they exceed 10% of your adjusted gross income (AGI). However, the California wildfires are classified as a qualified disaster, removing this AGI threshold, provided the loss exceeds $500.

Disaster Loss Election for Fast Tax Relief

Affected taxpayers have the option to claim disaster-related losses on their tax return for the year preceding the disaster. This election can expedite tax relief, allowing you to include the loss on your 2024 tax return for quicker access to refunds. Taxpayers may also wait until filing their 2025 tax return to make this election on an amended 2024 tax return. To make this election, you must use Form 4684 to file within six months of the due date of the disaster year’s tax return.

Qualified Disaster Relief Payments for Employees

Under Section 139, employers can provide non-taxable financial assistance to employees located in a federally declared qualified disaster area impacted by the California wildfires. These payments, which must meet specific criteria, are not considered wages and are exempt from federal income and employment taxes. Most notably, the payments must be used to reimburse employees for personal, family, living and funeral expenses incurred as a result of the disaster. State tax treatment may vary, so it is essential to check local regulations.

Wildfire Relief Payments: Excluding Income from Taxation

Qualified disaster relief payments are generally excluded from gross income. This means that individuals receiving funds from a government agency for reasonable and necessary personal, family, living expenses and amounts for repair of their home, or replacement of its contents may not be subject to tax on these funds. This relief encompasses expenses not covered by insurance, and expenses cannot be claimed as a deduction.

Steps to Claim Tax Relief for California Wildfire Victims

If you are seeking tax relief due to the California wildfires, it's important to consult with tax professionals experienced in disaster-related tax provisions. The IRS provides several resources, including guidance on disaster assistance and relevant publications, to assist those seeking relief. Engaging with these resources and leveraging expert advice can streamline the process and help maximize your available benefits.

Your Guide Forward

Navigating the tax relief options available for California wildfire victims can be complex, but understanding these provisions can significantly ease your financial burden. You can access the financial support you need by utilizing casualty loss deductions, disaster loss elections and qualified disaster relief payments. Remember to consult with a tax advisor so you can make the most of these benefits.

For more information on tax relief for California wildfire victims, visit the IRS website or consult with a Cherry Bekaert tax professional today.