As a result of the Secure 2.0 Act passed in 2022, taxpayers may make penalty-free withdrawals from theirretirement accounts if a disaster impacts them. These rules apply to federally declared major disasters occurringafter January 26, 2021.5

You can withdraw up to $22,000 without penalty from your IRA, 401(k), or 403(b) plan if your principal residence isin a major disaster area and you sustained an economic loss. Economic losses include property damage, loss dueto evacuating your home, or loss of income due to temporary or permanent layoff.6

The $22,000 limit applies to all of your retirement plans combined. You can wait up to 180 days after the disaster tomake your withdrawals.7

You can make these penalty-free withdrawals from your employer’s 401(k) or 403(b) plan whether or not theemployer amended the plan to permit them. If the plan does not permit them, you must file Form 8915-F with yourtax return to report the distribution as a qualified disaster recovery distribution.8

You must pay regular income tax on your withdrawals, but you may do so in equal amounts over three years. Forexample, if you withdraw $22,000, you may add $7,333 to your taxable income over each of the next three years.Alternatively, you can elect to include the entire $22,000 in income in the year of the distribution.9

You don’t have to repay the withdrawal. You have the option of repaying all or part of it.

If you are repaying it, you must do so within three years after receiving the withdrawal. If you repay, you may fileamended federal income tax returns to claim a refund of the tax you paid on the withdrawals for the prior years.

Qualified Disaster Relief Payments Are Tax-Free

Typically, when there is a major disaster, the victims receive payments and other aid from the federal government(FEMA) and often from state and local governments. Qualified disaster relief payments are tax-free to therecipients. These are payments11

to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses due to aqualified disaster;

for reasonable and necessary expenses to repair or rehabilitate a personal residence (including arented one) or to repair or replace its contents; or

made by federal, state, or local governments to promote general welfare following a qualifieddisaster (not including payments to businesses for income replacement or unemploymentcompensation).

For these purposes, qualified disasters include the following:12

Federally declared disasters

Disasters resulting from terrorist or military action

Disasters resulting from accidents involving common carriers (e.g., planes, trains)

Disasters from any other event determined to be catastrophic by the U.S. Secretary of the Treasury

You can exclude from income any qualified disaster mitigation payments made to lessen or avoid future disasters’effects.

Payments that charitable organizations make to disaster victims to help pay medical, temporary housing, ortransportation expenses are ordinarily tax-free to the recipients because they are gifts.13

Payments by employers to employees impacted by disasters for reasonable and necessary personal, family, orliving expenses also qualify as tax-free qualified disaster relief payments.14

Qualified Wildfire Payments Are Tax-Free

As a result of recent legislation, qualified wildfire payments are also tax-free. This new law came just in time to helpthe wildfire victims in Los Angeles, California.

Under the Federal Disaster Relief Act of 2023, which was signed into law in December 2024, taxpayers mayexclude from their income all compensation for losses or damages resulting from a qualified wildfire disaster—thisis any “federally declared disaster” [declared] after December 31, 2014, as a result of any forest or range fire.”15

Qualified wildfire payments are any amount that wildfire victims receive for their losses, expenses, or damages,including for

additional living expenses,

lost wages (other than lost wages paid by an employer),

personal injury,

death, or

emotional distress.

The relief applies to qualified wildfire relief payments received January 1, 2020, through December 31, 2025.

This legislation will, for example, help wildfire victims who have sued public utilities whose power lines causedmassive wildfires.

Key point. Taxpayers who already paid tax on qualified wildfire payments received in prior years may amend theirtax returns for a refund. The act extends to December 12, 2025, the deadline for wildfire victims to apply for arefund which extends the statute of limitations for 2020 and 2021 if needed.

Amended returns are also in order for all those who paid taxes in 2022 and 2023 and are now entitled to refunds.

This exclusion for qualified wildfire payments does not apply to payments received for losses, expenses, or damages already compensated from another source, such as insurance or qualified disaster relief payments.

🔥 Tax Relief for Wildfire Victims in Los Angeles 🔥

If you or someone you know has been impacted by the recent wildfires in Los Angeles, there are important tax benefits that could help ease the financial burden. Here’s what you need to know:

💰 Penalty-Free Retirement Withdrawals

Thanks to the SECURE 2.0 Act, individuals affected by federally declared disasters can withdraw up to $22,000 from their retirement accounts without early withdrawal penalties (though income tax still applies).
✔️ Applies to IRAs, 401(k)s, and 403(b)s
✔️ Must have sustained an economic loss (property damage, lost wages, evacuation costs)
✔️ Withdrawals must be made within 180 days of the disaster
✔️ Income tax can be spread over three years to ease the burden
✔️ Option to repay within three years for a tax refund

If your employer’s retirement plan doesn’t allow these withdrawals, you can still take advantage of this relief by filing Form 8915-F with your tax return.

🏠 Tax-Free Disaster Relief Payments

Financial assistance from FEMA, state/local governments, or employers to cover disaster-related expenses is not taxable if used for:
✅ Personal, family, living, or funeral expenses
✅ Repairs to a damaged home or personal belongings
✅ Payments made by government agencies to promote general welfare

💡 Employer Assistance: Payments from employers to help cover disaster-related personal or family expenses are also tax-free.

🔥 Wildfire-Specific Tax Relief

Under the Federal Disaster Relief Act of 2023, victims of qualified wildfire disasters can exclude compensation for losses, expenses, or damages from their taxable income. This includes:
🔥 Additional living expenses
🔥 Lost wages (excluding employer-paid wages)
🔥 Personal injury, emotional distress, or wrongful death compensation

📅 This relief applies to payments received from January 1, 2020, through December 31, 2025. If you previously paid tax on wildfire-related compensation, you may be eligible to file an amended return for a refund—with an extended deadline until December 12, 2025.

⚠️ Important Note: This exclusion does not apply to payments already covered by insurance or other disaster relief funds.

If you or someone you know has been impacted by the wildfires, now is the time to review these tax benefits and take action. Tax relief can make a big difference—don’t leave money on the table!

📩 Have questions? Let’s talk. #TaxRelief #WildfireRecovery #TaxPlanning