Reflecting on the Lahaina Fires: One Year Later and Understanding the Tax Implications

On August 8, 2023, the historic town of Lahaina on the Hawaiian island of Maui was devastated by one of the deadliest wildfires in U.S. history. The fire claimed the lives of at least 102 people and destroyed over 2,200 homes, leaving thousands without shelter. As we mark the one-year anniversary of this tragic event, the community continues to rebuild and remember those lost. Memorial events, including a paddle-out ceremony, have been held to honor the victims and support the survivors.

Tax Implications and the Casualty Loss Program

For those affected by the Lahaina fires, understanding the tax implications is crucial in navigating the financial aftermath. The IRS provides relief through the Casualty Loss Program, which allows taxpayers to deduct losses resulting from federally declared disasters.

What is a Casualty Loss?

A casualty loss is defined as the damage, destruction, or loss of property from a sudden, unexpected, or unusual event, such as a fire. For tax years 2018 through 2025, personal casualty losses are deductible only if they are attributable to a federally declared disaster. The Lahaina fires qualify under this provision, allowing affected individuals to claim deductions for their losses.

How to Claim a Casualty Loss Deduction

To claim a casualty loss deduction, taxpayers must file IRS Form 4684, "Casualties and Thefts," and include it with their federal income tax return. The deduction amount is the lesser of the adjusted basis of the property or the decrease in fair market value due to the casualty, minus any insurance or other reimbursements received.

Special Considerations for Federally Declared Disasters

Affected taxpayers claiming the disaster loss on their return should put the Disaster Designation, "Hawaii Wildfires", in bold letters at the top of the form. Be sure to include the FEMA disaster declaration number, DR-4724-HI on any return. See Publication 547 for details. The IRS will also waive the usual fees and requests for copies of previously filed tax returns for affected taxpayers.

Federal Relief payments are generally excluded from gross income. This means that affected taxpayers can exclude from their gross income amounts received from a government agency for reasonable and necessary personal, family, living or funeral expenses, as well as for the repair or rehabilitation of their home, or for the repair or replacement of its contents. See Publication 525 for details.

Additional relief may be available to affected taxpayers who participate in a retirement plan or individual retirement arrangement (IRA). For example, a taxpayer may be eligible to take a special disaster distribution that would not be subject to the additional 10% early distribution tax and allows the taxpayer to spread the income over three years. Taxpayers may also be eligible to make a hardship withdrawal. Each plan or IRA has specific rules and guidance for their participants to follow. (see this IRS Memo)

Insurance and Reimbursements

It's important to note that any insurance or other reimbursements received must be subtracted from the total loss amount. This currently does not include any anticipated settlement as the details have not been finalized. Taxpayers must file a timely claim for reimbursement to qualify for the deduction.

Looking Ahead

As Lahaina continues to rebuild, the community's resilience and the support from various relief programs, including tax relief, play a vital role in recovery. Understanding and utilizing the casualty loss program can provide significant financial relief to those affected, helping them to rebuild their lives and homes.

We have a one-page handout that you can download and give to anyone who might benefit from the Casualty Loss Program:

The one-year anniversary of the Lahaina fires is a poignant reminder of the community's strength and the importance of continued support and resources for recovery.

If you have any specific questions about claiming casualty loss deductions or need further assistance, feel free to ask!