New Federal Law Excludes Qualifying Eaton Fire Payments to Survivors From Federal Income Tax

Local residents who receive compensation for Eaton Fire losses, including qualifying payments from Southern California Edison, may exclude those amounts from their federal taxable income under a law President Donald Trump signed Friday.

The measure, H.R. 5366, is titled the Doug LaMalfa Federal Disaster Tax Relief Certainty Act. 

The exclusion is not unlimited. Under the law, a qualifying payment must be received by or on behalf of an individual, must compensate covered losses, expenses or damages resulting from a qualifying wildfire disaster, and is excluded only to the extent that insurance or another source did not already compensate the same loss. 

The new provision, added to the Internal Revenue Code by Section 3 of the act as Section 139M, applies to payments received in taxable years beginning after Dec. 31, 2025. The underlying fire must be a federally declared disaster resulting from a forest or range fire, declared after Dec. 31, 2014, and before Jan. 1, 2027. 

The Eaton Fire falls inside that window. FEMA records show the incident period for the Los Angeles County wildfires and straight-line winds began Jan. 7, 2025, and that the president issued California major-disaster declaration DR-4856 on Jan. 8, 2025. FEMA designated Los Angeles County, which includes Altadena, for Individual Assistance under that declaration. 

What the law covers 

Section 139M lists the categories of compensation that may be excluded from federal gross income: additional living expenses; qualifying lost wages, except wages paid by the employer that otherwise would have paid them; personal injury; death; and emotional distress. 

The law also contains an anti-double-benefit rule. A taxpayer may not claim a deduction or credit for an expenditure to the extent the related payment is excluded under Section 139M, and an excluded payment cannot increase the basis or adjusted basis of related property. 

A second part of the law changes how disaster casualty losses are deducted. Section 2 of the act amends Internal Revenue Code Sections 165(h) and 63(b), adding a special rule for “qualified net disaster losses.” A qualified disaster area under that section must be covered by a presidential major-disaster declaration issued under Section 401 of the Stafford Act, and the disaster’s incident period must have begun on or after Dec. 28, 2019, and before Jan. 1, 2027. 

According to House Report 119-605 and the Congressional Budget Office cost estimate, qualified disaster-related personal casualty losses are subject to a $500-per-casualty floor and are not reduced by the usual 10% of adjusted gross income threshold. The deduction is available to eligible taxpayers who do not itemize. Those casualty-loss changes apply to taxable years beginning after Dec. 31, 2024, and supersede specified earlier casualty-loss provisions for the same period.

The Federal Disaster Tax Relief Act of 2023 became Public Law 118-148 on Dec. 12, 2024, and excluded qualifying wildfire relief payments received in tax years beginning after Dec. 31, 2019, and before Jan. 1, 2026. The Internal Revenue Service summarized that earlier window as payments received from Jan. 1, 2020, through Dec. 31, 2025, for qualifying fires declared federal disasters in 2015 or later. 

Public Law 119-21, enacted July 4, 2025, further extended special casualty-loss treatment, but those rules still carried timing limitations. H.R. 5366 replaced those post-2024 casualty provisions with the simpler incident-period test. 

Local application and open questions 

Rep. Judy Chu, D-Calif., whose district includes Altadena and Pasadena, is a member of the House Ways and Means Committee and supported the measure. In a statement issued by her office after House passage, Chu said,”Survivors deserve the full amount of their settlements so they can rebuild their homes, restore their lives, and recover from the devastation they have endured.” 

Chu’s office said Sept. 12 that the law covers qualifying Eaton Fire settlement payments regardless of when they are received, subject to the statute’s post-2025 effective date and all eligibility language. 

Committee explanatory material uses the same “regardless of when received” phrasing. The operative effective-date clause in the enacted text, however, begins with payments received in taxable years beginning after Dec. 31, 2025. For otherwise qualifying payments received in those years, the enacted text sets no later receipt deadline. Sen. Adam Schiff, D-Calif., who cosponsored the Senate companion bill, said in a September 2025 announcement about that original measure that relief would extend to payments through 2030; the Ways and Means substitute adopted in March 2026 removed the receipt-date limit. 

During House floor debate, Rep. Vince Fong, R-Calif., described the bill as excluding recovery payments “through 2032.” That figure does not match the enacted text, which is keyed to payments in tax years after 2025 and to disasters declared before 2027 rather than to a 2032 payment cutoff. 

Several questions remain unresolved for Altadena claimants. 

The statute’s use of the word “individual” leaves open how claims submitted by businesses, partnerships, corporations, estates or certain trusts will be treated. 

The enacted text does not specifically resolve the treatment of attorney fees, punitive damages, prejudgment interest, business-entity claims, trust characterization or mixed settlement allocations. Records allocating settlement components and documenting insurance or other reimbursements will be material. 

The act governs federal income tax. California conformity to the new provisions has not been established, and the federal exclusion does not itself establish California income-tax treatment.

Existing Internal Revenue Service guidance is also out of date. The IRS wildfire relief payments and casualty losses frequently asked questions, published Nov. 3, 2025, describes the earlier law’s Dec. 31, 2025, payment cutoff and predates the September 2026 enactment by more than 10 months. 

Legislative path 

Rep. W. Gregory Steube, R-Fla., introduced H.R. 5366 on Sept. 15, 2025, under the short title Federal Disaster Tax Relief Act of 2025. The three original cosponsors were Reps. Mike Thompson, D-Calif.; Doug LaMalfa, R-Calif.; and Jimmy Panetta, D-Calif. Congress.gov’s cosponsor record lists 14 current cosponsors. 

Rep. Jason Smith, R-Mo., the Ways and Means chairman, offered the substitute amendment in committee and later moved House passage under suspension of the rules. The substitute renamed the measure for LaMalfa, who died in January 2026 at age 65. 

The committee adopted the substitute by voice vote on March 25, 2026, and ordered the amended bill favorably reported 43-0. House Report 119-605 was filed April 9, 2026. 

The House passed the bill April 27, 2026, under suspension of the rules by voice vote. The 43-0 tally was the committee vote, not the floor vote. The Senate discharged the Finance Committee and passed the bill without amendment by unanimous consent on Aug. 7, 2026, with no individual roll-call vote. The Senate companion, S. 2744, introduced by Sen. Rick Scott, R-Fla., on Sept. 9, 2025, remained at the introduced stage; H.R. 5366 was the vehicle enacted. 

During House debate, Smith said the measure “appropriately extends an existing provision within the law that allows taxpayers to deduct personal casualty losses stemming from a natural disaster while also excluding wildfire disaster relief payments from taxable income.” 

Steube said the legislation “provides certainty to disaster victims by extending and codifying commonsense tax relief for Americans impacted by federally declared disasters.” Thompson said, “People who lost everything should not have to come to Washington, D.C., to fight for relief.” 

Panetta, describing the second principal component of the bill, said it “would exempt fire settlements from taxation to avoid devastating tax bills on wildfire victims.” 

Fong said,”After these disasters strike in our community, survivors shouldn’t have to worry about burdensome Federal taxes as they work to recover and rebuild.” 

Rep. Jill Tokuda, D-Hawaii, said during the same debate,”Doug believed recovery should not come with a tax bill, and the Doug LaMalfa Federal Disaster Tax Relief Certainty Act makes sure of that.”

After the Senate vote, Sen. Ron Wyden, D-Ore., who requested the unanimous consent to discharge the Finance Committee and pass the bill, said that when a person loses a home in a wildfire,”the last thing you ought to be worried about is being hit by a massive tax bill.” 

Cost and claims data 

The Congressional Budget Office, incorporating the Joint Committee on Taxation’s revenue estimate, projected the measure would reduce federal revenues by $408 million over fiscal years 2026 through 2036 — $77 million attributable to the casualty-loss provisions and $331 million to the wildfire-payment exclusion. CBO estimated no direct-spending outlays and less than $500,000 in IRS administrative costs over fiscal 2026 through 2031, subject to appropriations. CBO noted uncertainty over how many taxpayers would claim the deductions or exclusions and in what amounts. 

That estimate, dated April 21, 2026, assumed enactment by April 30, 2026. Enactment occurred Sept. 11. The figures are projected federal revenue reductions, not projected payments to Eaton Fire survivors. 

The exclusion reaches qualifying payments received in 2026 and later, while Southern California Edison’s direct compensation program is operating and consolidated civil litigation over the fire moves toward trial.

Southern California Edison operates a voluntary Eaton Fire Wildfire Recovery Compensation Program. In a news release dated Aug. 28, 2026, the utility reported it had received more than 4,450 claims covering more than 13,600 individuals, trusts and legal entities; had extended more than 2,500 offers to nearly 6,300 claimants totaling more than $860 million; and had paid more than 3,100 claimants more than $460 million. The company said its program deadline was Nov. 30, 2026, and that participation before acceptance of an offer does not itself waive a claimant’s rights, though acceptance ultimately requires settlement conditions. 

Those claim, offer and payment figures are the company’s own reported program data. Independent confirmation would require audit or discovery. 

The company’s count of individuals, trusts and legal entities does not establish the population eligible for the federal exclusion, which applies to amounts received by or on behalf of an individual. 

SCE media relations can be reached at 626-302-2255 or news@sce.com. Chu’s Pasadena office is at 527 S. Lake Ave., Suite 250, and can be reached at 626-304-0110.