Rebuilding hope: Immediate assistance and financial guidance for wildfire victims

It is impossible to imagine the enormous loss and pain that people are experiencing since the wildfires broke out in southern California.

It’s even harder to imagine how thousands of people are going to rebuild their lives when the fires, which have devastated thousands of homes, businesses and acres of land, are under control and put out.

In facing one of the worst fire disasters in recent American history, the people of California need to know they are not alone. There is a nation of fellow citizens who want to help, as well as federal and state governmental agencies and volunteer organizations.

May there be some comfort in knowing there is help.

There are many sources of immediate help. Federal, state and local safety and emergency personnel, including military, national guard, police, fire and EMTs are focused on safety. Neighbors are there to help. Volunteers from around the country including private individuals and businesses.

Knowing where to seek help, whether it is for physical or health-related needs or emotional wellbeing, is paramount for individuals.

A number of organizations provide direct assistance to individuals and families including the American Red Cross, the Salvation Army and other volunteer organizations. These organizations provide food, shelter, supplies and assist in cleanup efforts.

In its guide “Recovering from Disaster,” the Federal Emergency Management Agency states: “The emotional toll that disaster brings can sometimes be even more devastating than the financial strains of damage and loss of home, business or personal property."

Individuals may want to contact local faith-based organizations, voluntary agencies or professional counselors for counseling services. Additionally, FEMA and state and local governments in the affected areas may provide crisis counseling assistance.

When you need funds

Here are some considerations for individuals and families as they think about next steps, where to go and how to access funds after suffering a loss of property or jobs.

FEMA announced that federal disaster assistance is available to the state of California to supplement recovery efforts in the areas affected by wildfires from January 7, 2025,  and President Biden signed a Major Disaster Declaration on January 8 to support recovery efforts.

According to the FEMA announcement, affected individuals may be eligible to receive money for essential items like food, water, baby formula, breast feeding supplies, medication and other emergency supplies. See FEMA to learn about the assistance available and how to apply.

Emergency policies for retirement savings

Congress also provides for ongoing disaster relief for distributions from retirement accounts in the case of federally declared major disasters.

Access to funds from retirement accounts

The IRS has published “Disaster relief frequently asked questions,” which answers questions about the SECURE 2.0 Act of 2022 and outlines the rules for distributions from retirement accounts for those impacted major disasters.

Here are some highlights of what you need to know:

Qualified federal disaster withdrawal  

• The SECURE 2.0 Act allows for up to $22,000 to be distributed from employer retirement savings plans or IRAs for affected individuals
• The withdrawals are not subject to a 10% early withdrawal penalty (but are subject to taxation)
• The taxes owed on the distribution can be spread equally over three years
• Distributions can be repaid into the retirement account to recoup tax payments

Retirement account emergency withdrawals

• Limited to one distribution annually from a defined contribution retirement plan or IRA, which cannot exceed $1,000.
• There is an option to repay the distribution using a tax-free rollover within three calendar years.
• Once a distribution is made, an individual cannot request another emergency distribution during the following three calendar years unless the previous distribution has been repaid or, the aggregate amount of contributions into the plan (employee and employer) after the previous emergency distribution is at least equal to the previous emergency distribution.
• Retirement plan providers and IRA custodians are not required to offer personal emergency distributions.
• IRS guidance includes examples of emergencies, but it is not an exclusive list. The account owner is allowed to self-certify to their plan provider or IRA custodian that they are dealing with an emergency situation. In a recent Notice, the IRS identifies factors to consider, including (but not limited to) medical care, accident or loss of property, foreclosure from a residence, funeral costs, auto repairs and “any other necessary emergency personal expenses.”

Loans from employer retirement plans

Not specific to disaster relief, most employer plans allow participants to access up to 50% of their vested balance or $50,000, whichever is less.

Tax filings on hold and other considerations

The IRS and the state of California have already announced extended tax filing deadlines.

The IRS has pushed back tax filing day for affected taxpayers to October 15, 2025.

Governor Newsom announced that taxpayers in Los Angeles County will be granted a postponement to October 15, 2025, to file California tax returns on 2024 income and make any tax payments that would have been due January 7, 2025, through October 15, 2025.

Property damage can be deducted on tax filings

In addition to filing a claim with an insurance company, property owners need to know that casualty losses—property damage from disasters—can be deducted on tax filings.

The IRS defines a personal casualty as a loss from casualty, disaster and theft that is not connected to a trade or business, or a for-profit transaction. Generally, if the loss is caused by a federally declared disaster, you may deduct personal casualty losses related to your home, household items and vehicles on your federal income tax return. The IRS has an information section on “Casualty, disaster and theft losses.”

Key considerations about casualty losses for taxpayers

• Generally, these losses are considered itemized deductions on the tax return.
• Net of any insurance payouts, taxpayers can deduct casualty losses of more than 10% of their adjusted gross income. Filers also need to subtract $100 from each casualty loss.
• The deduction can be used in the current tax year, or if the area is a federally declared disaster area, taxpayers can deduct a casualty loss on the preceding year’s tax return.

If you have a qualified disaster loss, you may also elect to deduct the loss without itemizing your deductions. Your net casualty loss doesn't need to exceed 10% of your adjusted gross income to qualify for the deduction.  But you would need to reduce each casualty loss by $500 after any salvage value and any other reimbursement. For more information, see the Instructions for Schedule A (Form 1040) or Instructions for Form 1040-NR and Publication 547.

Lastly, taxpayers experiencing very large, deductible casualty losses may see their income reduced significantly for a certain tax year. If the resulting tax bracket is much lower, it may make sense to consult with a financial advisor or tax professional to determine if generating additional income at lower tax brackets makes sense. For example, converting a traditional IRA to a Roth IRA and using the casualty loss to offset a portion of the income generated from the Roth IRA conversion.

Insurance actions

The National Association of Insurance Commissioners has published a Post-Disaster Claims Guide. The publication offers a step-by-step guide for next steps after surviving a disaster.

First, and foremost, is to make sure you and your family are safe.

• Secure your belongings
• Document damages, take pictures and save receipts 
• Find out the required timing for important deadlines for filing a claim
• File a claim with your insurance agent and explore homeowners insurance coverage and hazard policies
• Be aware of the process and your rights to appeal an insurance claim estimate that you do not think is accurate

Other financial considerations

• If appropriate, tap into an emergency fund and set priorities.
• Contact creditors immediately if the disaster has impacted your ability to pay bills or loans, and ask them for relief to stay in good standing. Forms of relief may include loan forbearance, lower monthly payments, deferred payments, waived interest or late fees, etc. 

• Use support networks and contact family and friends.
• Contact your student loan servicer and request "disaster forbearance.” Learn more at student aid.gov.
• Contact your loan servicer and see if there are options to request relief on mortgage payments.
• Check the FEMA website to apply for assistance. FEMA grants are generally not considered taxable income.
• Beware of disaster scams and red flags. FEMA has a fact sheet on what to look for.
• Gifts to qualified charities may be deductible, but direct donations to individuals in need are not deductible.  

A comprehensive guide

For a comprehensive guide on preparing for a disaster, including important steps to take after an event, see this resource from the American Red Cross, “Disasters and Financial Planning.”