The devastating Los Angeles wildfires have left thousands of Californians grappling with the loss of homes, businesses, and livelihoods. Amidst the immense personal challenges, understanding the available tax relief options can provide a crucial lifeline. The Internal Revenue Service (IRS) offers several provisions specifically designed to alleviate the financial burden on disaster victims, including casualty loss deductions, relaxed rules for accessing retirement funds, and extended deadlines for tax filings and payments. Navigating these complexities can be daunting, particularly with the potential loss of personal records and the disruption to professional tax services.
One significant relief measure introduced by the Secure Act 2.0 in 2022 allows individuals in federally declared disaster areas, like the Los Angeles fire zones, to withdraw up to $22,000 from retirement accounts (IRAs, 401(k)s, 403(b)s) without incurring the usual 10% early withdrawal penalty. This provision applies not only to those who lost their homes but also to those facing evacuation costs or disaster-related income losses. While the withdrawal is still subject to ordinary income tax, the tax burden can be spread over three years, and the withdrawn amount can even be repaid to the retirement account within the same period, effectively reclaiming paid taxes. This option presents a more advantageous approach compared to traditional hardship withdrawals, which are fully taxable immediately and generally subject to the 10% penalty, with no option for repayment. 401(k) loans are another possibility, allowing individuals to borrow up to half their vested balance or $50,000 (whichever is less), but unpaid loans are treated as taxable distributions and potentially subject to penalties. It’s important to note that plan administrators are not obligated to offer disaster distributions, hardship withdrawals, or loans.
For losses exceeding the retirement withdrawal limits, the IRS provides casualty loss deductions, specifically for individuals and businesses within federally declared disaster areas. This deduction can be claimed either on the tax return for the year the loss occurred or the previous year, offering potential tax refunds for those who paid substantial federal taxes. Claimants have until six months after the due date of the disaster year’s tax return (October 15, 2025, in this case) to make the election. The FEMA declaration number (4856-DR for the LA fires) must be included on the return. Calculating the casualty loss requires deducting any insurance or other reimbursements received or expected from the total loss. Therefore, meticulous record-keeping is crucial. While insurance claims should be filed promptly, FEMA assistance and SBA disaster loans are not available for insured losses. The 2017 tax reform eliminated miscellaneous itemized deductions, including unreimbursed employee business expenses, meaning losses of work-related equipment are no longer deductible as casualty losses.
Claiming a casualty loss necessitates itemizing deductions using Schedule A and Form 4684. Property type determines the reporting section: personal-use property (homes, cars) on Section A, and business/income-producing property on Section B. For completely destroyed business/income-producing property, the loss amount equals the adjusted basis (purchase price plus improvements minus depreciation). For personal-use or partially destroyed property, the loss is the lesser of the adjusted basis or the decrease in fair market value due to the damage. The basis for personal-use property is typically the purchase price plus long-term improvements. Substantiating improvement costs is essential, which can be challenging if records were destroyed. Reconstructing costs might involve canceled checks, credit card statements, insurance policies, mortgage statements, digital photos, or contractor records. County assessor records can sometimes confirm the original basis.
For uninsured personal-use property losses, deduct $100 per event and then 10% of adjusted gross income (AGI) from the remaining amount to arrive at the allowable loss. For instance, if a home with a $500,000 adjusted basis is destroyed, with $400,000 received from insurance, and the AGI is $100,000, the initial loss is $100,000. After subtracting $100 and 10% of AGI ($10,000), the deductible casualty loss is $89,900. If the loss deduction exceeds income, it may result in a net operating loss, which can be claimed even without owning a business.
The IRS provides filing and payment relief for those affected by the LA fires, extending various deadlines to October 15, 2025. This extension applies to individual income tax returns, payments, IRA and HSA contributions, estimated tax payments, as well as business and tax-exempt organization returns and payments, including partnerships, S corporations, corporations, and fiduciaries. Quarterly payroll and excise tax deadlines are also extended, with penalty abatement for deposits made by January 22, 2025. This relief is generally automatic for taxpayers with an IRS address of record in the disaster area. Those without an address in the affected area or with records located there should contact the IRS. Tax preparers with clients outside the disaster area can utilize bulk request options for disaster relief.
Navigating these tax complexities can be overwhelming, and seeking professional assistance is advisable. While the IRS-funded VITA program cannot assist with disaster losses, other resources are available. California offers a statewide legal assistance hotline providing free disaster legal services, connecting individuals with county-level partners or the DLAC helpline. Comprehensive information and legal resources, including insurance, housing, and consumer protection assistance, are available online. Replacing lost identification documents is crucial for accessing aid, and resources for obtaining duplicates are provided by the California State Bar. Additionally, the AICPA Benevolent Fund offers financial relief to affected members of the accounting profession. Utilizing these resources can provide crucial support during this challenging recovery period.
