Senate Passes Federal Disaster Tax Relief Act of 2023

(Parker Tax Publishing December 2024)

On December 4, the Senate passed the Federal Disaster Tax Relief Act of 2023, which extends the expanded personal casualty loss deduction under Code Sec. 165 under the Taxpayer Certainty and Disaster Relief Act of 2020 (Pub. L. 116-260) to taxpayers who suffered losses from major disasters occurring from January 1, 2020, through the date of enactment. The bill, which President Biden is expected to sign, also provides that payments that compensate taxpayers affected by certain wildfires and the East Palestine train derailment are excluded from gross income. H.R. 5863.

Qualified Disaster Relief Payments

Code Sec. 139 provides an exclusion from income for qualified disaster relief payments. Under Code Sec. 139(b), qualified disaster relief payments include amounts paid to an individual: (1) to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster; (2) to reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster; (3) by a person engaged in the furnishing or sale of transportation (i.e., common carriers) by reason of death or personal injuries as a result of a qualified disaster; or (4) by a federal, state, or local government, or agency or instrumentality thereof, in connection with a qualified disaster in order to promote the general welfare. These amounts do not include payments for any expenses compensated for by insurance or otherwise.

Qualified disaster relief payments also are excludable for purposes of self-employment taxes and employment taxes under Code Sec. 139(d).

A qualified disaster is defined in Code Sec. 139(c) as a disaster which results from a terroristic or military action (as defined in Code Sec. 692(c)(2)); a federally declared disaster (as defined in Code Sec. 165(i)(5)(A)); a disaster which results from an accident involving a common carrier or from any other event which would be determined by the Treasury Secretary to be of a catastrophic nature; or, for purposes of payments made by a federal, state or local government, or an agency or instrumentality of a government, a disaster designated by an applicable federal, state, or local authority to warrant assistance.

Personal Casualty Losses

Code Sec. 165(h) allows an individual taxpayer to claim an itemized deduction for a personal casualty loss. Under Code Sec. 165(h)(5), a loss attributable to a disaster declared by the President under Section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (i.e., the Stafford Act) is deductible only to the extent of (1) the sum of the individual's personal casualty gains plus (2) the amount by which aggregate net disaster-related losses exceed 10 percent of the individual taxpayer's adjusted gross income. After December 31, 2017, and before January 1, 2026, all other personal casualty losses are deductible only to the extent that the losses do not exceed the individual's personal casualty gains.

For individual taxpayers, personal casualty losses are defined in Code Sec. 165(c)(3)(B) as losses of property not connected with a trade or business or a transaction entered into for profit that arise from fire, storm, shipwreck, or other casualty, or from theft. Code Sec. 165(c)(3)(A) provides that personal casualty gains are recognized gains from any involuntary conversion of property not connected with a trade or business or a transaction entered into for profit that arise from fire, storm, shipwreck, or other casualty, or from theft. Under Code Sec. 165(h)(1), personal casualty losses are deductible to the extent they exceed $100 per casualty.

Taxpayer Certainty and Disaster Tax Relief Act of 2020

Congress has at times enacted more generous casualty loss provisions in response to specific natural disasters. Most recently, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (2020 Tax Relief Act) (Pub. L. 116-260) provided special rules for ''qualified disaster-related personal casualty losses,'' personal casualty losses arising in a qualified disaster area on or after the first day of the incident period of the applicable qualified disaster which are attributable to that qualified disaster. These losses are deductible without regard to whether aggregate net losses exceed 10 percent of a taxpayer's adjusted gross income. These losses are deductible to the extent they exceed $500 per casualty. These losses are allowed as a deduction in addition to the standard deduction and are allowed against alternative minimum taxable income.

A ''qualified disaster area'' refers to an area with respect to which a major disaster has been declared by the President during the period beginning on January 1, 2020, and ending on the date which is 60 days after the date of enactment of the 2020 Tax Relief Act, under Section 401 of the Stafford Act, if the incident period of the disaster with respect to which the declaration is made begins on or after December 28, 2019, and on or before the date of enactment of the 2020 Tax Relief Act. A qualified disaster area does not include any area with respect to which a major disaster had been declared only by reason of COVID - 19.

A ''qualified disaster'' is, with respect to the applicable qualified disaster area, the disaster by reason of which a major disaster was declared with respect to that area. The ''incident period'' is, with respect to the applicable qualified disaster, the period specified by the Federal Emergency Management Agency as the period during which the disaster occurred, except that the period is not treated as ending after the date which is 30 days after the date of enactment of the 2020 Tax Relief Act.

Federal Disaster Tax Relief Act of 2023 (H.R. 5863)

On December 4, the Senate passed by unanimous consent the Federal Disaster Tax Relief Act of 2023 (2023 Tax Relief Act) (H.R. 5863). The 2023 Tax Relief Act overwhelmingly passed the House in May by a vote of 382-7. The 2023 Tax Relief Act (1) extends the provisions of the 2020 Tax Relief Act to allow losses from federally declared disasters that occur from January 1, 2020, through the date of enactment to be deducted from income taxes without itemizing and without a reduction based on adjusted gross income; and (2) excludes compensation for losses from some wildfire disasters and the East Palestine, Ohio, train derailment from gross income.

Observation: Provisions of the 2023 Tax Relief Act were included in the Tax Relief for American Families and Workers Act (H.R. 7024), a bipartisan effort by Sen. Ron Wyden and Rep. Jason Smith to restore the deduction for domestic research expenditures, 100 percent bonus depreciation, and the business interest deduction in exchange for enhancements to the child tax credit and the low-income housing tax credit. That bill passed the House in January, but stalled in the Senate. Passage of the 2023 Tax Relief Act all but ensures that the remaining provisions of H.R. 7024 will be included in next year's negotiations regarding the extension of the expiring provisions of the Tax Cuts and Jobs Act or 2017.

The 2023 Tax Relief Act broadens the definition of qualified disaster area in 2020 Tax Relief Act to include any area with respect to which a major disaster was declared by the President during the period beginning on January 1, 2020, and ending on the date which is 60 days after the date of enactment of the 2023 Tax Relief Act, under Section 401 of Stafford Act if the incident period of the disaster begins on or after December 28, 2019, and on or before the date of enactment of the 2023 Tax Relief Act. The incident period will be treated as ending no later than the date which is 30 days after the date of enactment of the 2023 Tax Relief Act.

Thus, under the 2023 Tax Relief Act, certain disaster-related personal casualty losses attributable to major disasters beginning any time after the date of enactment of the 2020 Tax Relief Act and through the date of enactment of the 2023 Tax Relief Act are provided the same treatment as qualified disaster-related personal casualty losses under the 2020 Tax Relief Act.

The 2023 Tax Relief Act also provides an exclusion from gross income for amounts received as qualified wildfire relief payments. Qualified wildfire relief payments are amounts received by or on behalf of an individual as compensation for expenses or losses incurred as a result of a qualified wildfire disaster. Qualified wildfire relief payments do not include payments for any expenses or losses compensated for by insurance or otherwise. A qualified wildfire disaster is any Federally declared disaster (as defined in Code Sec. 165(i)(5)(A)) declared, after December 31, 2014, as a result of any forest or range fire. No deduction or credit is allowed with respect to any expenditure to the extent of the amount excluded under the proposal with respect to the expenditure. The basis of any property is not increased by amounts excluded from gross income under the proposal.

In addition, the 2023 Tax Relief Act treats East Palestine train derailment payments as qualified disaster relief payments for purposes of Code Sec. 139(b). As a consequence, the payments are excluded from gross income and are subject to other present-law provisions, such as the employment tax exclusions from wages and net earnings from self-employment under Code Sec. 139(d) and the prohibition on double benefits under Code Sec. 139(h) applicable to qualified disaster relief payments. An East Palestine train derailment payment is as any amount received by or on behalf of an individual as compensation for loss, damages, expenses, loss in real property value, closing costs with respect to real property (including realtor commissions), or inconvenience (including access to real property) resulting from the East Palestine train derailment if the amount was provided by a federal, state, or local government agency, Norfolk Southern Railway, or a subsidiary, insurer, or agent of Norfolk Southern Railway or any related person. For this purpose, East Palestine train derailment means the derailment of a train in East Palestine, Ohio on February 3, 2023.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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