Disaster Tax Law Opens a New Review of 2025 Returns

The disaster tax law signed September 11 gives accounting firms a reason to reopen some client files. It does not give every disaster victim a refund, and it does not make every old return eligible for a fresh claim.

Public Law 119-108 codifies enhanced treatment for qualified net disaster losses and adds Section 139M for certain wildfire payments. The casualty-loss amendments apply to tax years beginning after December 31, 2024. The wildfire exclusion starts with payments received in tax years beginning after December 31, 2025.

For a calendar-year individual, that creates two separate review lists: 2025 returns with potentially overlooked casualty losses, and qualifying wildfire payments received in 2026 or later. The date of the disaster alone cannot tell the preparer which rule governs.

The casualty provision removes the 10%-of-adjusted-gross-income floor for a qualified net disaster loss and permits a deduction for qualifying taxpayers who do not itemize. A $500 per-casualty reduction applies to the relevant personal casualty losses.

Eligibility depends on a presidential major-disaster declaration and a FEMA incident period beginning on or after December 28, 2019, and before January 1, 2027. The loss must arise in the qualified disaster area on or after the incident period’s first day and be attributable to that disaster.

That makes clients who skipped a 2025 loss because they took the standard deduction a useful starting point. But the amount still needs support. Reconcile basis and valuation records with insurance and other recoveries. A client cannot turn a reimbursed loss into an additional deduction simply because the disaster qualifies.

The broad incident-period window does not mean the new amendments apply to every return dating back to 2019. Their effective date remains tax years beginning after 2024.

Section 139M excludes qualifying compensation received by or on behalf of an individual for losses, expenses or damages from a qualifying wildfire. The statutory examples include additional living expenses, personal injury and emotional distress. Lost wages can qualify, but not when paid by the employer that otherwise would have paid them.

The underlying federal disaster must have been declared after December 31, 2014, and before January 1, 2027, because of a forest or range fire. Unlike the casualty rule, this test uses the declaration date, not the beginning of a FEMA incident period.

The exclusion applies only to the extent the compensated losses were not otherwise covered by insurance or another source. It also prohibits a deduction or credit for expenditures covered by excluded amounts and prevents those amounts from increasing property basis. Read the settlement agreement and reimbursement records together before treating a payment as tax-free.

The law expands substantive relief without creating a general new refund-claim window. Review the filing deadline and any applicable disaster postponement independently of eligibility.

Also distinguish an amended return from the election to claim a disaster loss in the preceding year. IRS Publication 547 describes a general election deadline six months after the original return’s regular due date, without extensions. For an ordinary calendar-year 2025 loss, it identifies October 15, 2026. That date has passed; any different deadline needs a specific basis.

The best next step is a documented review, not a blanket amendment campaign: identify the disaster, the tax year, the uncompensated loss or payment and the available filing procedure. Only then calculate the benefit.