California Expands Wildfire Settlement Tax Relief: What Taxpayers Need to Know

Wildfires have become a recurring challenge in California, leaving behind not only physical damage but also complex financial and tax consequences. For many taxpayers, wildfire-related settlements have provided critical financial relief. Now, thanks to California Senate Bills 132 and 159, more taxpayers may qualify for state income tax exclusions on wildfire settlements—with rules that are broader than federal relief.

At Velin & Associates, Inc., our team closely monitors these changes so our clients—whether they are YouTubers, Shopify store owners, doctors, dentists, filmmakers, Amazon business owners, or high net worth individuals—stay compliant while maximizing available relief.

What Changed Under SB132 and SB159?

• SB132 (June 2025):
  Created a retroactive personal income tax and gross income exclusion for settlement amounts received by qualified taxpayers affected by wildfires. The exclusion applies to tax years 2021 through 2029.
• SB159 (September 2025):
  Expanded the exclusion by eliminating the requirement that payments come from class-action settlements. Now, even if you received compensation through an individual lawsuit, the amounts may qualify.
• Who qualifies?
  • Homeowners in wildfire-affected areas
  • Residents who lived in impacted zones
  • Business owners who operated in affected zones

That means if you received a settlement due to wildfire damages—whether for property damage, lost income, or business disruption—those amounts may now be excluded from California taxable income.

How Does This Compare to Federal Relief?

The Federal Disaster Tax Relief Act (FDTRA), signed in December 2024, also provides income exclusions for wildfire relief payments. However:

• Federal exclusion covers 2020–2025 tax years only.
• Payments must be tied to federally declared disasters.
• Relief is limited to expenses not otherwise covered by insurance or other reimbursements.

California’s law goes further:

• Covers 2021–2029 tax years.
• Applies to more wildfire events, including the Los Angeles wildfires of early 2025.
• Does not limit relief to expenses uncovered by insurance.

For many Californians, this creates a broader window of opportunity to claim exclusions.

Why Timing Matters

The statute of limitations for 2021 tax year refunds could expire as soon as April 15, 2026. That means taxpayers need to act quickly to review past returns, determine eligibility, and file refund claims where appropriate.

At Velin & Associates, we’re already helping clients identify cases where amended returns may be filed to capture these exclusions before deadlines close.

Examples:

• CPA for YouTubers / TikTokers / Creators:

If a content creator lost filming equipment or studio space in a wildfire and later received a settlement, that payment may now be excluded from California taxable income.

• CPA for Shopify Store / Amazon Business Owners:

Online sellers whose warehouses or inventory were destroyed by fires can exclude compensation from settlements—reducing taxable income and freeing up cash flow.

• Dentist CPA / Medical Practice CPA:

A dental office or medical clinic forced to close due to wildfire damage may have received settlements for lost business income. With SB159, these settlements can now be excluded from taxable income at the state level.

• CPA for Filmmakers / Entertainment Professionals:

Production delays and destroyed sets caused by wildfire damage often lead to settlements. These funds may now be excluded from income—making a big difference for California-based filmmakers.

• High Net Worth Individuals:

For those with multiple properties or business holdings in wildfire-prone regions, settlement amounts could be substantial. Properly applying these exclusions may save tens or even hundreds of thousands in state taxes.

Key Takeaways

✔ California SB132 and SB159 broaden wildfire settlement income exclusions.
✔ Relief is retroactive to 2021 and extends through 2029.
✔ Both class-action and individual lawsuit settlements now qualify.
✔ California’s exclusion is broader than federal FDTRA rules.
✔ Deadlines are critical—refund claims for 2021 may need to be filed before April 15, 2026.

Next Steps

If you or your business received wildfire-related settlements, now is the time to act. Reviewing your past and current tax filings could unlock significant savings. At Velin & Associates, Inc., our CPAs specialize in complex tax planning for creators, medical professionals, online business owners, and high net worth individuals.

For more information about our tax planning services, contact us today: visit our website.

Velin & Associates, Inc

8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org