Fire survivors across the North State have another reason to celebrate this holiday season.
The highly-anticipated Federal Disaster Tax Relief Act was passed by Congress this month and was signed into law by President Joe Biden. It’ll mean the return of an estimated $500 million paid in taxes to communities devastated by wildfire.
It won’t happen overnight, but as the IRS works to implement the bill, local tax preparers and residents are celebrating what may be Christmas in July for fire survivors next year.
Bruce Yerman directs the Camp Fire Collaborative and said rebuilding after the 2018 disaster has been slow.
Many fire survivors put their life on hold, fearful of the tax implications of spending money received from settlement payments.
“It’s hard to plan for your future when you don’t know what’s coming,” he said.
Settlement payments were considered “income” and were taxed accordingly. This meant thousands of Camp Fire survivors also lost medical and other social security benefits due to their sudden influx of “income.”
“It just makes sense that the fire victims and fire survivors have this funding coming back to them,” Yerman said. “It never should have gone. It was almost like it was a double tax.”
The return of this money will help residents with their permanent housing plans, rebuilding efforts and whatever next steps they have planned, Yerman said.
What does the bill do?
The Federal Disaster Tax Relief Act will retroactively exempt disaster settlement payments from income taxes. Since the Camp Fire — which six years ago destroyed the town of Paradise and neighboring communities — more than $10 billion has been paid to survivors by Pacific Gas and Electric for their role in starting the fire.
But that money has been slow to reach survivors with a large percentage of payments going toward lawyers fees and income taxes. These payments were also considered part of a person’s “Adjusted Gross Income.” This is a threshold used by most federal and state agencies to determine the amount of benefits a person can receive based on their income.
"It was kind of a slap in the face. You know one day, you're at least maybe hopeful about rebuilding because you're being told that there's a giant, multibillion dollar settlement for victims, hypothetically, and then you find out how much of it is not going to you.”John Veale, Legislative Director for Rep. Doug LaMalfa
John Veale is the Legislative Director for Congressman Doug LaMalfa, one of the champions of this bill. He said after lawyers fees and taxes, many fire survivors saw 60-70% of their settlement payments taken in fees beginning in 2020. This is when lawmakers realized the scope of the problem, he said, and began working on a solution.
“It was kind of a slap in the face,” Veale said. “You know one day, you're at least maybe hopeful about rebuilding, because you're being told that there's a giant, multibillion dollar settlement for victims, hypothetically, and then you find out how much of it is not going to you.”
The finalized bill was passed by congress on Dec. 5, after years of revision and updates. It was signed into law by Biden a week later on Dec. 12.
Now, the work of implementing the bill has shifted to the IRS, who will work on providing guidance to tax professionals on how exactly to request refunds for fire survivors.
Who qualifies? When will survivors see funds?
Residents who received settlement funds from federally declared wildfire disasters from 2014 onward and who paid income taxes on these payments are eligible for returns. But when these returns will reach the pocketbooks of wildfire survivors is another story.
John Knecht is the owner of Sharrett Bookkeeping and Income Tax Service in Paradise. His office is packed with walls of blank paper and special folders for amended tax returns for the upcoming extra-busy tax season.
Knecht said his team has been working around the clock to begin the tedious process of filling out three years worth of amended tax returns for all of his clients, all before beginning the normal 2024 tax season.
He said this is the reality for tax preparers across the region — getting ready for the directions the IRS will provide.
“Do we cite the legislation? Do we cite the Camp Fire disaster, FEMA number?” Knecht said. “The IRS has to be prepared to accept these returns because if people file too early, the IRS is going to either delay the processing or reject the filing, which is only going to create a bigger backlog.”
For now, his team and others like them are doing their best to get the process started. Once the IRS issues guidance survivors can file. After filing, it will take several weeks to months for refunds to be sent out.
Despite the tedious work ahead, Knecht said the community is rejoicing.
“One of the local firms sent out a letter a couple of days ago to clients saying ‘please bear with us because we are celebrating like you, we have fire survivors within our staff too,’” he said. “So all of us, survivor or not, in one way or another are celebrating.”
If the IRS moves quickly and preparers are able to get out amended returns early, Knecht said fire survivors could see funds coming back to them as early as next summer.
An IRS spokesperson said the agency isn’t sure what the timeline looks like yet but that they’re working on implementation.
