Will LA fire survivors owe taxes on settlement payouts? CA senator pushes for waiver

Payments from Southern California Edison — the utility whose equipment is believed to have started the Eaton Fire — could help some families rebuild their destroyed homes. But those payments also could land homeowners with a huge tax bill.

To address this problem, California Sen. Alex Padilla has introduced a bill that would make existing tax exemptions permanent for wildfire survivors.

Congress passed exemptions one year ago, but they’re set to expire at the end of 2025. Unless Congress approves new exemptions, homeowners who accept wildfire compensation next year could have their payouts taxed.

“When a fire survivor is wading through the ashes of their former home and thinking about how to rebuild their life, the last thing they should have to worry about is how they’re going to afford to pay taxes on any settlement they receive,” Padilla said Friday in a written statement.

Bill has bipartisan support 

The bill — co-sponsored by Republicans Cynthia Lummis of Wyoming and Tim Sheehy of Montana, along with Democrat Ron Wyden of Oregon — would extend the existing protections under a bill passed in 2024. Padilla introduced that bill to refund federal income tax payments on wildfire payouts from the Butte, North Bay and Camp fires.

As fire-ravaged communities approach the one-year anniversary of a disaster that destroyed more than 13,000 homes, homeowners in and around Altadena are facing tough choices on whether to join the compensation program set up by SoCal Edison.

Taking a payout could be a faster route to obtaining funds to aid with rebuilding. But recipients will forfeit their right to sue SoCal Edison for potentially greater compensation.

The compensation program has faced criticism from some survivors who say the utility is lowballing families in need of faster payouts.

What about the Palisades? And state taxes?

Palisades Fire survivors have not been offered compensation funds because that fire began with an alleged arson, not from any utility equipment malfunctioning.

California lawmakers already have passed a law exempting wildfire settlement payouts from state income tax until 2030.

The bill, as currently written, would apply to any federally declared disaster stemming from a wildfire that happened after the start of 2015. Payouts eligible for tax exemption would include any compensation for losses, expenses or damages not already covered by insurance.