If you received a wildfire settlement in 2025, the entire payment — living expenses, lost wages, injury compensation, emotional distress, and even the portion attributable to the lost home — was excludable from federal gross income under the Federal Disaster Tax Relief Act (H.R.5863). If you receive the same settlement on January 2, 2026, under current law, none of that exclusion applies. The same loss, a different tax year, and a federal tax bill that was zero last week is now material.
The exclusion was always time-limited: qualified wildfire relief payments received during taxable years beginning after December 31, 2019, and before January 1, 2026, for any forest or range fire federally declared in 2015 or later. That window closed December 31, 2025. Congress knew it would — the IRS FAQ still describes the 2020–2025 exclusion — and bipartisan bills to extend it have been introduced but not enacted as of early 2026. Until one is, 2026 settlements are taxable.
What Was Excluded — and For How Short a Time
Under H.R.5863 Sec. (a), a qualified wildfire relief payment was any payment received to compensate losses, expenses, or damages incurred as a result of a qualified federally declared forest or range fire, to the extent not compensated by insurance or other reimbursement. That included compensation for additional living expenses, lost wages, personal and property losses, and injury or death — the whole settlement, with no allocation required.
The exclusion applied to the entire settlement, regardless of how the settlement agreement allocated among categories, and California conformed so that qualifying wildfire settlements were zero for California tax regardless of the federal treatment — a point that still holds for California filers even as the federal exclusion lapses.
The limitation on application — only for taxable years beginning after December 31, 2019 and before January 1, 2026 — was explicit in the bill text, and the period-of-limitation extension for refund claims allocable to the exclusion was part of the same section. Those who received payments in 2020–2025 and did not exclude them have an extended window to claim a refund, but those who receive payments in 2026 cannot exclude them unless a new law is enacted.
Why 2026 Lawsuits Are Now Taxable
Thousands of plaintiffs suing utilities for recent wildfires — including the Los Angeles County Eaton Fire cases — face settlement negotiations in 2026 where the federal exclusion is unavailable under current law. The same is true for survivors in Colorado, Hawaii, and Oregon whose cases were already in litigation when the exclusion expired. As AP and Withum note, the federal exclusion for payments received in 2026 and later is unavailable, and taxability now turns on narrower, allocation-dependent exclusions:
-
§104(a)(2) for physical injury. Only amounts allocable to physical injury or physical sickness are excludable. Emotional distress alone, without physical injury, is taxable, and the allocation in the settlement agreement will be respected only if it is negotiated at arm's length and is not a tax-motivated re-labeling. A global settlement that does not allocate will be allocated by the IRS and courts.
-
§1033 for total loss deferral. Amounts attributable to the destruction of a principal residence and its contents may qualify for gain deferral if the proceeds are used to acquire replacement property within the statutory period. That defers, not excludes, the gain, and it requires tracing the replacement.
-
No blanket living-expense exclusion. Additional living expenses that were fully excludable as qualified wildfire relief in 2025 are taxable in 2026 unless they qualify under §104 as part of a physical injury recovery or under another specific exclusion.
In practical terms, a $800,000 settlement in 2025 was $0 of federal gross income if qualifying. The same $800,000 in 2026 may be $0 only to the extent the parties can support a physical-injury allocation — perhaps $300,000 — with the remaining $500,000 taxable at ordinary rates, plus self-employment tax considerations if any portion compensated lost business income.
What Congressional Proposals Would Do
Bipartisan bills led by Senator Wyden and others would extend the qualified wildfire relief exclusion and, in some versions, extend the ability to make tax-deductible payments from wildfire settlements through 2030. One Senate proposal would also provide tax relief for victims of federally declared disasters through the end of 2026 more broadly, covering hurricanes and other disasters alongside wildfires. None has been enacted as of the current filing season, and the gap between the expiration and any extension is precisely where 2026 settlements fall.
If you are in active settlement negotiations, the tax treatment should be a negotiation point, not an afterthought. A settlement that closes in December 2025 versus January 2026 has a different federal tax cost, and a settlement that allocates generously and supportably to physical injury has a different cost than one that does not. Those differences should be priced.
The Bookkeeping Implication
Wildfire relief payments that were excluded did not need to be reported as income and did not generate a tax basis in the recovery — they were simply excluded. Taxable payments must be reported, allocated, and, where applicable, deferred via §1033 with a replacement property schedule. The record that supports the allocation — medical records for physical injury, appraisals for property loss, and the settlement allocation itself — is now the tax return's foundation, not an optional attachment.
Simplify Your Financial Management
Wildfire recovery is already a multi-year financial project — living expenses, rebuilding, and litigation that outlasts the disaster. The Federal Disaster Tax Relief Act made the tax chapter simple for 2020–2025; for 2026, it is allocation-specific and taxable by default. Beancount.io keeps every settlement payment, every allocation, and every deferral election in plain-text, version-controlled accounting — so the tax treatment you claim is traceable to the loss it compensates. Get started for free and keep your recovery finances as documented as your recovery itself.