This bill would create temporary tax-relief provisions aimed at individuals and entities affected by federally declared disasters. It adds a temporary earned-income rule for 2025 filers, expands the ability to claim disaster-related charitable deductions, relaxes rules around qualified-disaster retirement distributions and loans, and extends certain tax advantages for disaster-impacted housing credits.
The package is designed to provide liquidity and flexibility to disaster survivors, donors, and relief organizations while preserving core tax rules. It also expands relief for disaster-related casualty losses and sets definitions to guide who qualifies for these temporary provisions.
At a Glance
What It Does
The bill establishes a temporary earned-income rule for 2025 that allows taxpayers to base credits on prior-year earnings if current-year earnings fall. It also creates a streamlined, temporary allowance for qualified disaster relief contributions and expands disaster-related retirement-distribution and loan rules.
Who It Affects
Individuals with income in 2025 who live in or were displaced by a qualified disaster, charitable donors and organizations seeking disaster relief deductions, retirement plan participants and sponsors, and housing credit programs in disaster zones.
Why It Matters
The provisions are meant to inject liquidity, simplify compliance during disaster recovery, and encourage charitable giving and retirement-plan flexibility in the wake of major disasters.
More articles like this one.
A weekly email with all the latest developments on this topic.
What This Bill Actually Does
The core mechanics are grouped into several temporary accommodations. First, Section 2 creates a temporary earned-income rule for the 2025 tax year.
If a taxpayer’s earned income in their first 2025 taxable year is lower than their prior-year income, the taxpayer can elect to base credits (including the 24(d) child tax credit and the 32 earned-income credit) on the prior year’s earnings. A qualified individual is defined by residency in a disaster area or zone while displaced by the disaster, ensuring that the relief targets those actually affected.
Joint returns receive the same treatment if either spouse is a qualified individual, and any substitution is treated as a clerical/ mathematical error if misapplied. This section does not alter general gross-income determinations except where the substitution is effected.
Second, Section 3 temporarily relaxes charitable-contribution limitations. Disaster-relief contributions paid in cash to qualified organizations during a defined window are treated as qualified disaster relief contributions, with specific rules for individuals and corporations on deductions and carryovers.
Donor-advised funds and certain donor entities are limited by explicit exclusions. Third, Section 4 broadens the use and treatment of qualified disaster distributions from retirement plans, including a $100,000 aggregate cap on distributions that can be treated as qualified disaster distributions, a 3-year spread of income from such distributions, and a 60-day window to roll over distributions into eligible plans.
Loans from qualified plans receive temporary relief on limits and repayment schedules during the incident period. Fourth, Section 5 adjusts disaster-related casualty-loss rules by increasing the casualty-loss deduction, modifying the standard deduction to reflect the disaster loss, and aligning other related tax provisions to recognize disaster impact.
Fifth, Section 6 extends the exclusion related to wildfire losses through 2036. Finally, Section 7 expands low-income housing credits by increasing state ceilings for 2026 and 2027 in qualified disaster zones and extends the placement-in-service deadlines for these credits.
Overall, the bill packages temporary tax relief and recovery mechanisms for disaster-impacted individuals and entities while preserving the core tax framework.
The Five Things You Need to Know
The bill temporarily lets taxpayers use prior-year earned income to calculate certain credits in 2025 if current-year earnings fall.
Qualified disaster relief contributions receive temporary enhanced deductibility, with tight caps and exclusions for donor-advised funds.
Disaster distributions from retirement plans can be up to $100,000 in aggregate and are eligible for a 3-year income spread.
Disaster-related casualty losses trigger higher deductions and an adjusted standard deduction for the disaster year.
State-level housing-credit ceilings rise for 2026–2027 in qualified disaster zones, with extended timing for placed-in-service deadlines.
Section-by-Section Breakdown
Every bill we cover gets an analysis of its key sections.
Temporary earned-income rule for credits
Section 2 creates a temporary rule allowing a qualified individual to substitute prior-year earned income for the first taxable year starting in 2025 when calculating credits under code sections 24(d) and 32. The definition of a qualified individual centers on residence and displacement related to a qualified disaster. For joint returns, the rule applies if either spouse is qualified, and the combined prior-year earned income is used. The provision treats errors as mathematical or clerical if misapplied and keeps gross income determinations otherwise intact.
Temporary modification of charitable contribution rules
Section 3 suspends the limitations on cash charitable contributions for disaster relief. Qualified disaster relief contributions paid in cash to an eligible organization during 2025 can be deducted subject to new caps tied to the taxpayer’s existing deduction base. Corporations and individuals face different limitations and carryover rules. The section defines qualified disaster relief contributions narrowly, including a prohibition on contributions to certain donor-advised funds and some organizations. The election mechanics apply at the individual level, with separate treatment for partnerships and S corporations.
Special disaster-related rules for use of retirement funds
Section 4 expands relief for retirement-plan distributions and related transactions. A qualified disaster distribution is exempt from 72(t) penalties up to an aggregate $100,000 for an individual, subject to a three-year income-spread, and a 60-day rollover window to transfer funds to an eligible retirement plan. It also extends special loan rules for qualified individuals (raised loan limits and delayed repayments during the incident period). Provisions clarify the treatment of these distributions under various plan types and the coordination with applicable rollover rules.
Special rules for disaster-related personal casualty losses
Section 5 revises the disaster casualty-loss framework by increasing the deduction amount for qualified disaster-related losses, adjusting the standard deduction upward to reflect the disaster loss, and aligning the treatment of net disaster losses with general deduction rules. The aim is to recognize the economic impact of disasters more fully in the affected year and reduce the after-tax burden on disaster victims.
Extension of exclusion for wildfire loss compensation
Section 6 extends the existing wildfire loss exclusion through 2036, updating the relevant statute to reflect a longer relief horizon for taxpayers affected by wildfires, consistent with the disaster-relief framework established in this act.
Additional low-income housing credit allocations
Section 7 increases the state housing credit ceiling for 2026 and 2027 by the aggregate amount allocated to buildings in disaster zones. The increase is capped by an applicable dollar limitation, defined by state population. The section also extends placed-in-service deadlines for designated housing credits and clarifies how these increases interact with overall state ceilings and carryover provisions.
Definitions
Section 8 provides the definitions for qualified disaster area, qualified disaster zone, qualified disaster, and incident period. It ties these terms to major disaster declarations under the Stafford Act and specifies the temporal window during which the incident period applies for purposes of the act. These definitions anchor all temporary relief provisions and ensure consistent application across sections.
This bill is one of many.
Codify tracks hundreds of bills on Finance across all five countries.
Explore Finance in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Low- and moderate-income taxpayers in qualified disaster areas benefit from the earned-income substitution rule in 2025, reducing tax liability when earnings fall.
- Taxpayers who make qualified disaster relief contributions benefit from temporary increased deductibility for cash donations supporting disaster relief (subject to caps).
- Retirement-plan participants in disaster areas gain access to tax-favored distributions and loan relief, including the ability to spread income from distributions over three years and extended rollover options.
- Disaster-impacted homeowners relying on qualified disaster distributions for home purchases may benefit from recontribution provisions and extended loan-relief rules.
- State housing credit agencies and developers in disaster zones gain higher ceilings for 2026–2027, enabling more affordable housing projects in affected areas.
Who Bears the Cost
- The federal government potentially foregoes some revenue due to expanded deductions and credits enacted on a temporary basis.
- IRS and plan administrators face administrative costs to implement and monitor these temporary rules and ensure compliance.
- Employers and sponsors of qualified retirement plans may incur costs to amend plans and communicate temporary rule changes to participants.
- State housing agencies may have administrative and modeling costs in managing increased housing-credit allocations and deadlines during the relief period.
- Donor-advised funds and certain donor organizations face limits and exclusions that constrain some charitable activities.
Key Issues
The Core Tension
The bill must balance immediate liquidity and recovery incentives for disaster-affected individuals and communities against the risk of eroding long-term tax base and creating administrative complexity for taxpayers, employers, and the IRS.
The act leans on temporary relief measures that intersect with existing tax rules, requiring careful coordination to avoid unintended tax planning exploits. The net effect on revenue will depend on how broadly the temporary provisions are claimed and how taxpayers respond with charitable giving, retirement-plan distributions, and housing-credit investments during the relief period.
The timing and manner of plan amendments—per Section 4’s provisions—could create administrative work for employers and plan sponsors, potentially spreading across multiple plans and jurisdictions. While the bill aims to accelerate disaster recovery, the temporary nature of many provisions raises questions about continuity and sunset mechanics if disasters persist or recur.
Try it yourself.
Ask a question in plain English, or pick a topic below. Results in seconds.