ByRobert W. Wood,
Senior Contributor.
California is no stranger to wildfires. Over many years, numerous fire victims have suffered losses and hope to recover funds via insurance and from lawsuits. Fire victims are often surprised at the significant income tax consequences they encounter, both in sheer complexity and in the often surprising tax treatment they face on their proceeds.
For fire victims in federally declared disasters, the skies parted in late 2024 with a broad federal tax exemption to make wildfire settlements tax free if received in 2020 through 2025. Yet even that tax relief provision includes puzzling qualifiers that exclude many recoveries. The federal law is also sunsetting at year end, so unless it is extended by Congress, it will be of no help to the legions of fire victims who expect to eventually recover from defendants in 2026 and ensuing tax years.
But what about California tax law? California passed a series of fire specific wildfire exemptions so that at least some recoveries are free of California tax, but these rules were spotty and they omitted numerous fires and fire victims. As more tax bills were introduced, on September 29, 2024, Governor Newsom vetoed two additional bills that would have granted state-level income tax exclusions to certain wildfires. The Governor explained that he vetoed the bills, not because he disagreed with the idea that recoveries should be tax-free, but because he believed that a wildfire exclusion should be addressed more systematically as part of the annual budgeting process, not on a wildfire-by-wildfire basis.
