S. 2744 — Federal Disaster Tax Relief Act of 2025

This section establishes special income tax treatment for qualified disaster-related personal casualty losses (i.e., losses from federally declared major disasters under the Stafford Act with incident periods beginning after July 4, 2025, and before January 1, 2027), for losses incurred in taxable years beginning after December 31, 2024. (As background, personal casualty losses are deductible under IRC §165(h) only to the extent they exceed a per-loss floor and 10% of adjusted gross income, with losses generally limited to those in federally declared disaster areas.) Specifically, the section (1) waives the 10% adjusted gross income limitation for qualified net disaster losses (i.e., such losses exceeding personal casualty gains); (2) revises the per-loss floor to $100 ($500 in the case of any net disaster loss to which IRC §165(h)(3) applies) (from $500 ($100 for taxable years beginning after December 31, 2009)); (3) allows a disaster loss deduction above the line as part of the standard deduction calculation (i.e., excess of qualified net disaster losses over personal casualty gains, adjusted for certain gains); and (4) excludes the disaster loss deduction from alternative minimum tax adjustments. (Thus, disaster victims may deduct net qualified disaster losses fully above the $100 floor without regard to the 10% adjusted gross income threshold.)

This section codifies, as new IRC § 139M, an exclusion from gross income for qualified wildfire relief payments received by individuals during taxable years beginning after December 31, 2025, and before January 1, 2031. Qualified wildfire relief payments include amounts compensating for losses, expenses, or damages—including additional living expenses, lost wages (except those paid by an employer), personal injury, death, or emotional distress—from a qualified wildfire disaster (i.e., a federally declared disaster after December 31, 2014, due to a forest or range fire), to the extent not compensated by insurance or otherwise. (Thus, recipients receive these payments tax-free but may not claim related deductions, credits, or basis adjustments, preventing double tax benefits.)