Doug LaMalfa Federal Disaster Tax Relief Certainty Act, H.R. 5366, 119th Cong. (2026) (Enrolled Bill)

For tax practitioners representing clients in disaster-impacted regions, the legislative landscape is on the precipice of a significant, taxpayer-favorable shift. As of August 19, 2026, the Doug LaMalfa Federal Disaster Tax Relief Certainty Act (H.R. 5366) has successfully passed both the House of Representatives and the Senate and is currently on the President’s desk awaiting signature. Introduced in the House on September 15, 2025, and reported with amendments by the Committee on Ways and Means on April 9, 2026 (H. Rept. 119-605), the bill passed the House under a suspension of the rules on April 27, 2026. The Senate subsequently discharged its Committee on Finance and passed the bill without amendment by Unanimous Consent on August 7, 2026.

Should this bill be signed into law by the President, it will amend the Internal Revenue Code (I.R.C.) of 1986 to “codify and extend the rules for personal casualty losses arising from major disasters and the rules for the exclusion from gross income of compensation for losses or damages resulting from certain wildfires.” For Certified Public Accountants (CPAs) and Enrolled Agents (EAs), this legislation represents a critical stabilization of disaster tax relief, transitioning temporary, ad-hoc disaster provisions into a structured statutory framework within I.R.C. § 165 and § 63, and introducing a brand-new exclusion under I.R.C. § 139M.

Codification of Special Rules for Qualified Net Disaster Losses

Under existing law, personal casualty losses are highly restricted. I.R.C. § 165(h)(2)(A) generally mandates that net personal casualty losses are deductible only to the extent they exceed ten percent of the taxpayer’s adjusted gross income (AGI). Furthermore, pursuant to I.R.C. § 165(h)(5), for taxable years beginning after December 31, 2017, personal casualty losses are strictly limited to those “attributable to a Federally declared disaster” or a “State declared disaster”.

Section 2(a) of H.R. 5366 drastically alters this restrictive regime for qualified disasters by adding a new paragraph (6) to I.R.C. § 165(h), titled “Special rule for qualified net disaster losses.” This provision effectively bypasses the ten percent AGI floor for “qualified net disaster losses.” Specifically, the statute dictates:

“If an individual has a qualified net disaster loss for any taxable year, the amount determined under paragraph (2)(A)(ii) shall be the sum of— (i) such qualified net disaster loss, and (ii) so much of the excess referred to in the matter preceding clause (i) of paragraph (2)(A) (reduced by the amount in clause (i) of this subparagraph) as exceeds 10 percent of the adjusted gross income of the individual.”

By structuring the deduction this way, Congress has insulated the “qualified net disaster loss” from the ten percent AGI reduction, while ensuring that any other, non-qualified personal casualty losses remain subject to the standard ten percent AGI floor.

To apply this rule, practitioners must master three distinct statutory definitions introduced by Section 2(a) of the bill:

First, the term “qualified net disaster loss” is defined under I.R.C. § 165(h)(6)(B) as the excess, if any, of:

“(i) qualified disaster-related personal casualty losses, over (ii) personal casualty gains reduced by the portion of such gains taken into account under paragraph (5)(B)(i).”

Second, the underlying “qualified disaster-related personal casualty losses” are defined under I.R.C. § 165(h)(6)(C)(i) as:

“...losses described in subsection (c)(3) (determined after application of paragraph (1)) which arise in a qualified disaster area on or after the first day of the incident period of the qualified disaster to which such area relates, and which are attributable to such disaster.”

Third, the “qualified disaster area” is defined under I.R.C. § 165(h)(6)(C)(ii) as:

“...any area with respect to which a major disaster has been declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act if the incident period of the disaster with respect to which such declaration is made begins on or after December 28, 2019, and before January 1, 2027.”

This retroactive inclusion back to December 28, 2019, is a massive win for taxpayers, as it encompasses major disasters spanning the last several tax years, ensuring administrative certainty through the end of 2026. The term “incident period” means “the period specified by the Federal Emergency Management Agency as the period during which such disaster occurred.”

Modifications to the Per-Casualty Dollar Limitation

In addition to bypassing the ten percent AGI floor, H.R. 5366 modifies the per-casualty dollar limitation under I.R.C. § 165(h)(1). Existing statutory language had set the individual floor at $100 (or $500 for certain historical periods).

Section 2(b) of the bill amends I.R.C. § 165(h)(1) by striking “$500 ($100 for taxable years beginning after December 31, 2009)” and inserting:

“$100 ($500 in the case of any qualified disaster-related personal casualty losses (as defined in paragraph (6)(C)))”.

Consequently, if a client suffers a standard, non-disaster-related personal casualty loss (to the extent still deductible under I.R.C. § 165(h)(5)(B)’s gain-matching rules), the loss is only deductible to the extent it exceeds a $100 threshold. However, if the loss is a “qualified disaster-related personal casualty loss,” the taxpayer must reduce the loss by a higher statutory floor of $500 per casualty. This $500 per-casualty floor acts as a minor trade-off for the highly lucrative elimination of the ten percent AGI limitation.

Standard Deduction Addition for Non-Itemizing Taxpayers

Historically, personal casualty losses were classified as itemized deductions, meaning taxpayers who claimed the standard deduction received zero federal tax benefit from their losses. Section 2(c) of H.R. 5366 resolves this inequity by amending I.R.C. § 63(b), which defines taxable income for individuals who do not elect to itemize their deductions.

The bill amends I.R.C. § 63(b) by striking “and” at the end of paragraph (6), replacing the period at the end of paragraph (7) with “, and”, and appending a brand-new paragraph (8):

“(8) so much of the deduction allowed by section 165(a) as is attributable to the qualified net disaster loss (as defined in section 165(h)(6)(B)).”

This statutory adjustment is of paramount importance. It converts the qualified net disaster loss into an addition to the standard deduction, reducing taxable income without requiring the taxpayer to itemize deductions (acting as a below-the-line addition to the standard deduction under § 63(b)(8) rather than an adjustment to gross income under § 62). Taxpayers can now claim both the full standard deduction and their qualified net disaster losses, dramatically expanding the tax relief available to low- and middle-income individuals who do not itemize.

Effective Dates and Statutory Coordination of Casualty Loss Rules

The amendments executed by Section 2 of the Act are retroactive to some extent but are designed to integrate seamlessly into ongoing tax years. Under Section 2(d)(1), the statutory amendments:

“...shall apply to taxable years beginning after December 31, 2024.”

To prevent overlapping claims or statutory confusion with prior temporary disaster relief legislation, Section 2(d)(2) establishes a strict coordination rule:

“Section 304(b) of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (division EE of Public Law 116-260) and section 70438 of Public Law 119-21 shall not apply to any taxable year beginning after December 31, 2024.”

This ensures that the newly codified I.R.C. § 165(h)(6) acts as the exclusive statutory mechanism for qualified disasters for the 2025 tax year and beyond, overriding the previous patchwork of temporary acts.

The Inception of Section 139M: Exclusion of Wildfire Compensation Payments

For practitioners representing clients affected by forest or range fires, Section 3 of H.R. 5366 represents one of the most significant tax developments in recent years. It amends Part III of subchapter B of chapter 1 of the Code by inserting a brand-new section: I.R.C. § 139M.

Under I.R.C. § 139M(a), the general rule is established with total clarity:

“Gross income shall not include any amount received by an individual as a qualified wildfire relief payment.”

This creates a complete exclusion from federal gross income for certain compensation payments, sparing affected taxpayers from a potentially devastating federal tax liability on their disaster recoveries.

To qualify for the exclusion, the payment must meet the statutory definition of a “qualified wildfire relief payment” under I.R.C. § 139M(b)(1):

“...any amount received by or on behalf of an individual as compensation for losses, expenses, or damages (including compensation for additional living expenses, lost wages (other than compensation for lost wages paid by the employer which would have otherwise paid such wages), personal injury, death, or emotional distress) incurred as a result of a qualified wildfire disaster, but only to the extent the losses, expenses, or damages compensated by such payment are not compensated for by insurance or otherwise.”

Crucially, this exclusion covers a broad range of compensatory payments, including emotional distress, personal injury, additional living expenses, and even certain lost wages, provided they were not paid by the employer who would have normally paid those wages. However, it is strictly limited to uncompensated losses (i.e., those not covered by insurance or other forms of reimbursement).

The underlying “qualified wildfire disaster” is defined under I.R.C. § 139M(b)(2) as:

“...any Federally declared disaster (as defined in section 165(i)(5)(A)) declared after December 31, 2014, and before January 1, 2027, as a result of any forest or range fire.”

This extensive twelve-year retroactive window (dating back to January 1, 2015) provides massive relief to individuals who have received or will receive wildfire litigation settlements, class-action payouts, or state-funded relief payments related to historic wildfires.

Statutory Disallowance of Double Benefits

To prevent what Congress views as “double-dipping,” I.R.C. § 139M(c) contains strict “Denial of Double Benefit” rules. Under these provisions:

“(1) no deduction or credit shall be allowed (to the individual for whose benefit a qualified wildfire relief payment is made) for, or by reason of, any expenditure to the extent of the amount excluded under this section with respect to such expenditure, and (2) no increase in the basis or adjusted basis of any property shall result from any amount excluded under this section with respect to such property.”

Practitioners must carefully review their clients’ tax returns to ensure that any expenses funded by tax-excluded wildfire relief payments are not also claimed as business expenses, medical expenses, or personal casualty loss deductions. Furthermore, if a payment is used to repair or replace property, the taxpayer cannot increase the adjusted basis of that property by the tax-excluded amount.

Section 3(c) of the bill sets the effective date for this new exclusion, noting that the provisions:

“...shall apply to payments received in taxable years beginning after December 31, 2025.”

Technical Planning and Practice Implications for CPAs and EAs

The impending enactment of the Doug LaMalfa Federal Disaster Tax Relief Certainty Act demands immediate, proactive outreach to affected clients. Practitioners must execute several critical planning steps:

First, for clients who suffered personal casualty losses in a qualified disaster area where the incident period began on or after December 28, 2019, through the 2024 tax year, practitioners should analyze whether amending prior-year returns (Form 1040-X) is viable and beneficial under the newly codified, AGI-floor-free rules, provided the statutory period of limitations for filing a claim for refund remains open.
Second, because the qualified net disaster loss is deductible above-the-line under I.R.C. § 63(b)(8), practitioners should review standard deduction clients who experienced qualified disasters. Clients who previously chose not to deduct casualty losses because they did not itemize will now find themselves eligible for substantial tax write-offs.
Third, for clients receiving wildfire relief payments, practitioners must meticulously trace the payments to document that they represent compensation for losses, expenses, or damages resulting from a “forest or range fire” Federally declared disaster between 2015 and 2026. Detailed bookkeeping is required to ensure compliance with the double-benefit disallowance rules under I.R.C. § 139M(c), separating insurance payouts from wildfire relief payments and tracking basis adjustments.

Ultimately, this Act provides a welcome, standardized statutory framework, replacing the administrative headache of temporary tax extenders and providing clear, reliable relief to disaster victims and their tax advisors alike.

Prepared with assistance from Gemini Notebook.