If you’re working with a wildfire lawyer, one of the first questions you’ll likely ask is whether your settlement will be taxed. The answer depends on what the settlement is paying for. Under federal and state tax laws, certain portions of a personal injury settlement can be taxed. However, the majority of these settlements are not subject to taxation, or qualify for tax relief under disaster laws.
Federal Tax Regulations
The Federal Disaster Tax Relief Act of 2023 helped protect wildfire victims from having to pay taxes on disaster payments. This law allows settlement recipients to exclude specific disaster payments from their gross income for tax purposes.
According to federal tax rules, settlements or wildfire relief payments received to compensate a victim for fire-related costs, losses or damages are not taxable. They can legally be excluded from gross income on tax paperwork. This includes compensation paid for:
- Physical injury, including burns and smoke inhalation injuries
- Medical costs associated with wildfire injuries
- Relocation and living expenses
- Property damage compensation
- The death of a loved one
- Emotional distress connected to physical injury
If these expenses were also paid for by the victim’s insurance provider, however, they are taxable. In addition, if medical care costs were listed as an itemized deduction on a previous tax year, that portion of a settlement will be taxed.
What Are the Exceptions?
Although the majority of wildfire settlements are not taxable in California, portions may be taxed for damages that qualify as exceptions under federal law. These include:
- Lost wages
- Business losses
- Commercial property damage
- Interest accumulated on a settlement or judgment
- Punitive damages
- Damages for emotional distress only (not connected to physical injury)
Since some parts of a settlement may be subject to taxation, it is important to organize your settlement correctly to avoid being overly taxed.
California State Settlement Taxation
Effective from January 1, 2021, to January 1, 2030, Senate Bill 159 waived state income taxes for wildfire victims who receive settlements from entities found to have started the wildfires – primarily, utility companies. Any wildfire that is declared a state or federal disaster is exempt from settlement taxation under this bill.
Before the passing of this bill, a similar rule was in place that only applied to settlements gained from class-action lawsuits. SB 159 broadened the language to cover all wildfire settlements from at-fault parties. This law works retroactively; anyone who already paid income taxes on a past settlement that is within this timeframe is eligible for a refund through an amended state tax return with the Franchise Tax Board.
How a Wildfire Lawyer in California Can Help
Working with an experienced wildfire lawyer in California can make it easier to understand and navigate your tax obligations. Your attorney will know how to organize your settlement in a way that avoids excessive taxation, such as by clearly separating the taxable and untaxable portions. Your lawyer will also be aware of all current tax relief programs that may apply to your settlement.
State and federal tax laws are constantly changing. For an in-depth review of your wildfire case with a knowledgeable attorney, contact Bridgford, Gleason & Artinian. We offer free initial consultations.