Do disaster losses get the same federal and state tax rules?
Picture one storm damaging similar homes on opposite sides of a state line. Beginning with 2026 tax years, both homeowners could qualify for a federal casualty loss deduction even without a presidential disaster declaration, if the event meets the federal definition of a state-declared disaster, but their state returns could produce different results.
Under the One Big Beautiful Bill Act (OBBBA), a state-declared disaster may now open the door to a federal personal casualty loss deduction, but it does not require the taxpayer’s state to follow the same treatment.
Federal eligibility does not settle the state return
For tax years beginning after Dec. 31, 2025, OBBBA made the federal limitation on personal casualty losses permanent and expanded §165(h)(5) to include certain state-declared disasters.
Under the amended statute, a state-declared disaster must involve a natural catastrophe or a fire, flood or explosion that both the governor and the Treasury secretary determine caused enough damage to warrant §165 treatment.
Once that requirement is met, an individual’s qualifying personal casualty loss may be deductible on the federal return; attention would then turn to the taxpayer’s state to determine tax treatment. A state may conform to current federal law or apply a different rule, such as an earlier conformity date or specific decoupling provision.
State-declared relief has limits
Unless another special provision applies, a personal casualty loss from a federally declared or qualifying state-declared disaster remains subject to the regular $100-per-casualty reduction and a limitation equal to 10% of adjusted gross income (AGI), and the taxpayer generally must itemize. Do not confuse these losses with qualified net disaster losses under §165(h)(6).
- Under the Doug LaMalfa Federal Disaster Tax Relief Certainty Act, qualifying personal casualty losses from presidentially declared major disasters with incident periods beginning after Dec. 27, 2019, and before Jan. 1, 2027, receive more favorable treatment, including a $500 per-casualty reduction, no 10%-of-AGI limitation and no itemizing requirement.
The OBBBA change also does not expand the §165(i) election to deduct a loss on the preceding year’s return. That election continues to apply to losses attributable to a federally declared disaster.
Federal filing and payment postponements are separate. Under the Filing Relief for Natural Disasters Act, the IRS may grant deadline relief after receiving a written request from the governor, so preparers must confirm that the IRS actually announced relief rather than assuming the casualty loss rules extended the deadline.
Federal and state disaster loss treatment compared
| Review point | Federal treatment | State-return treatment |
|---|---|---|
| Effective date | State-declared-disaster expansion applies to tax years beginning after Dec. 31, 2025 | Depends on the state’s conformity date and legislation |
| Qualifying declaration | A federal declaration may qualify. A state declaration may also qualify if it meets the definition in §165(h)(5)(C) | The state decides whether and how it recognizes the federal provision |
| Ordinary personal loss limits | Generally reduced by $100 per casualty and 10% of AGI; taxpayer generally must itemize | State limits may follow the federal calculation or require an adjustment |
| Qualified net disaster loss | More favorable rules apply to qualifying presidentially declared major disasters with incident periods beginning after Dec. 27, 2019, and before Jan. 1, 2027 | State treatment must be checked independently |
| Prior-year election | Section 165(i) applies to federally declared disasters, not solely state-declared disasters | State law may permit, modify or reject the federal election |
| Filing and payment relief | Not automatic. Confirm an IRS announcement covering the taxpayer, location and deadline | Check the state tax agency’s separate relief announcement |
| Business or income-producing property | The OBBBA expansion concerns personal casualty losses. Business and income-producing losses are governed under other provisions of §165 | Review state conformity and state-specific adjustments |
Give the state return its own review
A storm may not change when it crosses a state line, but its tax treatment can.
Verify that the event meets the federal requirements for a federally declared or qualifying state-declared disaster and retain the supporting authority in the client file. Separately check IRS disaster-relief announcements for any filing or payment postponement.
Then treat the state return as a second analysis. Check the state’s conformity rules and casualty-loss instructions, document the authority used and explain any federal-state difference to the client before filing.
For more guidance, watch NATP’s Understanding Tax Impacts of Casualty Losses and Ponzi Schemes on-demand webinar. The course examines the tax treatment of casualty losses along with Ponzi scheme losses so you can apply the rules with confidence.
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NATP Staff