Hurricane Milton victims could get more generous tax breaks. Senators just need to vote for them.

The bill spotlights a little-used part of the tax code and is a rare instance of political bipartisanship in 2024, as weather events intensify across the country. The question is whether there’s the political will to fast-track the bill.

The Federal Disaster Tax Relief Act was passed by the Republican-controlled U.S. House of Representatives in May on a 382-7 vote. It excludes from income taxes payments related to natural-disaster-related settlements and expands a tax deduction designed to defray unreimbursed losses incurred by disaster victims. To become law, the bill still needs to make it through the Senate and then to be signed by the president.

“I absolutely think Helene should put pressure [on lawmakers to pass the bill],” said Jennifer Gray Thompson, founder and CEO of After the Fire USA, an organization that has helped communities navigate recovery efforts after catastrophic fires. “It can deliver more relief to more people who have already lost everything.”

Before the May vote, the proposal easily passed the House as part of a larger package that included changes for the child tax credit and business tax rules. But that package stalled in the Senate.

As part of her work, Gray Thompson has spent three years pressing for simpler tax rules for survivors of natural disasters. On Capitol Hill, Gray Thompson said she’s often heard this is “a 2025 issue” — a reference to when a big debate will unfold on expiring Trump-era tax cuts.

But there’s no time to wait, she said: “We don’t really listen to that, because we have to do right by survivors now.”

Senate Majority Leader Charles Schumer, a Democrat, needs to bring the bill to a vote as soon as possible, Rep. Greg Steube wrote in a Sarasota Herald-Tribune opinion piece last week. Steube, a Republican, sponsored the House bill, and his district includes Sarasota, which was directly in Hurricane Milton’s potential path.

Steube wasn’t available for an interview due to hurricane preparation, a spokesperson said. Schumer’s office did not immediately respond to a request for comment.

“From hurricanes to wildfires, too many Americans have incurred thousands of dollars in disaster-related expenses. We shouldn’t saddle survivors with unfair taxes as they work to rebuild their lives,” said Rep. Mike Thompson, a Democrat representing a northern California district scorched by wildfires. Thompson, who worked with Steube on the bill that passed in May, said he’d keep pressing for the bill’s passage in the Senate.

Taxes after a natural disaster

Like much else involved in disaster recovery, Americans must work through a complicated tangle before the tax code offers help.

The IRS has already pushed back a range of tax filing and payment deadlines for people and businesses in states hit by Hurricane Helene. That includes extending the deadline to May 1, 2025, for 2024 income tax returns and for 2023 returns with an extension. The IRS commonly postpones deadlines after natural disasters.

The 2017 Tax Cuts and Jobs Act limited the use of this deduction through 2025 but said it still applied to losses linked to a federally declared disaster. There are still catches, however.

First, this is an itemized deduction, which relatively few people use. Approximately 90% of taxpayers have been taking the standard deduction in recent years after it was boosted by the 2017 tax law.

Meanwhile, the mix of insurance and taxes get complicated. In essence, the damage needs to be at least a $100 loss and must also be more than 10% of taxpayer’s adjusted gross income, according to the IRS. (A different formula for “qualified disaster loss” applied generally for certain events from 2016 to 2021.)

Under the widely supported House bill, people can claim the deduction “above the line,” so they can also take the standard deduction, Steube’s office said. Losses also don’t have to be over 10% of adjusted gross income.

The number of people claiming the deduction was already tiny before the 2017 law change, when it shrank further, according to Congressional Research Service, a nonpartisan analysis agency of the federal government. The average deduction was worth nearly $39,000 in the 2018-20 window, the agency said.

Taxpayers seeking to claim the deduction need to submit Form 4684. The IRS isn’t expecting people to submit appraisal or adjuster documents in support of their claim, said Jim Buffington, an adviser-services leader at Intuit ProConnect. But it’s a good idea to hold onto records in case the agency ever questions the claimed amount, he added.

It may take time for insurance payments and government aid to materialize, Buffington noted, but it is possible to initially file a tax return with the standard deduction and to later amend the return in order to itemize and claim the loss, he said. There’s generally a three-year window to amend a return, he said.

When it comes to evaluating the claimed loss, the IRS urged people “act in good faith and make reasonable estimations based on all information available,” saying it has “extensive experience with disaster situations and will be reasonable in determinations.”

What’s taxable?

The Federal Emergency Management Agency says its disaster grants do not count as taxable income and will not upend eligibility for Social Security, Medicare, Medicaid or the Supplemental Nutrition Assistance Program.

The bill at issue would exclude compensation from legal-settlement money and certain other relief payments from income taxes. One example would be the payments from utility companies to California wildfire victims, After the Fire’s Gray Thompson said.

Here’s current tax rules produce “all these ancillary, cascading, horrible, really devastating effects,” she said, such as lost scholarships or veterans missing out on benefits.

But “most disasters don’t have a claimant. Most don’t have an entity they are suing,” Gray Thompson said, which is why the deduction needs improvement. FEMA is making “huge inroads,” she said, but “unless we give people some individual relief, they are just not as likely to rebuild.”

Gray Thompson said she’s seen the same amount of compassion and care for the issue from both parties, but she acknowledges this is just one part of the tax code.

“We’re part of the larger conversation and we are not naive. I can understand that. But I am also politely furious,” she said. Passing the bill is “absolutely the most humane thing we can do.”

With less than a month before the presidential election and with a debate over the expiration of the Trump-era Tax Cuts and Jobs Act looming next year, Henrietta Treyz, managing partner of investment adviser Veda Partners, estimates there’s no chance of the bill passing before then. Immediately after the election, she said, there’s a 25% chance “at best.”

But Hurricane Milton may change that. “Depending on how atrocious this hurricane is, I may update my odds,” she said, “but hopefully it won’t be and Congress will be able to afford not taking action.”