The Assistance Payment You Don't Have To Pay Taxes On

According to the National Centers for Environmental Information (NOAA), the U.S. has been hit with 403 natural disasters since 1980, with each of those events costing the equivalent of $1 billion or more. That's a total of over $2.9 trillion. In 2024 alone, there were 27 recorded natural disasters tied to climate or weather, and NOAA has determined these climate-based disasters are occurring with more frequency and higher costs — and damage to property as a result of climate disasters is one of the top things insurance companies don't want to cover. Most of this cost is incurred by disruptions to local businesses and supply chains, damage to physical buildings including homes and public infrastructure, and the destruction of vehicles leading to car insurance rates rising in five states.

As a result, homeowners should also consider how disaster relief impacts their tax situation. Mainly, this relies on policies dictated by the IRS whereby your eligibility for a special form of tax relief for disaster assistance is determined by specific factors. According to a 2019 investigation by NPR, on average, Americans from affluent communities were given more federal relief funding, based on a cost-benefit analysis to taxpayers. As per the report, people with lower incomes don't typically receive substantial tax returns, so not being taxed on disaster relief is of special benefit to families in those communities after a disaster.

The IRS webpage provides up to date information about tax regulations in each state related specifically to disaster relief. What states have access to these specific provisions are based on FEMA's declarations of individual assistance. Clicking on any of the states on the page will bring you to a trail of announcements up to the most recent tax provisions the IRS allows for disaster assistance in that region.

As these tax benefits are based on FEMA disaster assistance, it's important to understand FEMA's eligibility criteria too. First, you need to be a U.S. citizen, qualified alien, or non-citizen national to claim assistance. You also need a valid Social Insurance number FEMA will use to verify your identity, and if you require Home Repair or Replacement Assistance, proof that the residence located in the disaster zone is actually owned by you. This information is typically obtained through public records. Finally, if your insurance company fails to cover all your losses and you wish to claim disaster assistance, you'll need written proof of your denied claims. If you are approved for assistance by FEMA, you may then take advantage of tax relief on disaster assistance once the IRS announces the tax provisions for your state.

If you happen to have felt the financial burn of the most recent LA wildfires, the IRS determined you were eligible for tax relief on disaster assistance in an announcement on January 7, 2025. Using California as an example, the IRS explains that if your address of record falls within an accepted disaster area, they automatically provide you with tax filing and penalty relief without you needing to contact them. 

Business owners and citizens living in a disaster zone can claim uninsured or unreimbursed losses as a result of the disaster for up to six months after the cut off date for their federal income tax return. This would require the inclusion of a FEMA declaration number or a return claiming a loss. With the impact of climate change on auto insurance rates and the ways climate disasters will affect Americans' ability to get a mortgage in specific states, any form of financial relief after a disaster is a benefit. 

In California, the IRS is also allowing recipients of disaster assistance to exclude the relief from their gross income, including assistance for living expenses, funerals, housing repairs, replacement costs, psychological distress, personal injury, and lost wages, outside of anything reimbursed by an employer. Also, people collecting retirement income are eligible to receive a special disaster distribution without the 10% early distribution tax for up to three years.