No more federal income tax relief for wildfire survivors after Congress fails to extend exemption

At the end of 2024, wildfire survivors who had waited years to be paid in settlements over powerline-ignited fires got major relief from the federal government: they would not have to pay federal income taxes on the damages they were awarded.

But the short-lived Federal Disaster Tax Relief Act is coming to an end. The law expires at the end of 2025. Any wildfire-related settlement payments beginning in 2026 will again be subject to federal income taxes.

Congress failed before recessing Thursday to vote to extend the 2024 act via a proposal co-sponsored by Oregon’s U.S. Sen. Ron Wyden and a bipartisan group of western senators and representatives.

Their new bill would have made permanent the protections signed into law under the 2024 law. That law not only ensured federal income tax wouldn’t be applied to wildfire-related damages that were awarded from 2020 to present — over fires going back all the way to 2016 — but also ensured no income tax would be applied to any portion of those awards that covered lawyers’ fees, living expenses, lost wages, or compensation for injury, death, or emotional distress.

“The last thing Oregonians need when they’re rebuilding after a wildfire is to get clobbered by a big tax bill on their financial settlements,” Wyden said in a statement. Toby Riffle, a Wyden spokesperson, said getting federal income tax relief for survivors is one of the senator’s top priorities ahead of the next fire season.

In 2024, the Oregon Legislature unanimously passed Senate Bill 1520 ending state income taxation on settlements and lawyer fees for wildfire victims. The bill was championed by survivors of the 2020 Labor Day Fires.

The average amount that electric utility PacifiCorp, owner of Oregon-based Pacific Power, has been ordered by a jury to pay to survivors of several of the 2020 Labor Day fires in the Santiam Canyon is roughly $5 million, according to Cody Berne, an attorney for Portland-based law firm Stoll Berne who represents wildfire victims. PacifiCorp is appealing that order.

Under federal income tax rates, a $5 million award would leave the average fire survivor turning over about one-third of their PacifiCorp settlement to the federal government, Berne told the Capital Chronicle earlier this year.

A state-sponsored bill that would have required utilities causing a powerline-ignited fire to cover the cost of federal income taxes on settlements paid to survivors died in the final hours of the recent Oregon legislative session.