Wildfire Settlements Now Tax-Free In California

California has passed two laws that keep some wildfire victims from having to pay state taxes on the money they got from a court settlement. 

One law is used to get money back from PG&E, and another is used to sue Edison. Both bills give much-needed tax breaks, but the IRS still taxes lawsuit payouts.

Doug LaMalfa (R-Calif) and Mike Thompson introduced the bill (D-Calif). It would prevent thousands of fire victims from paying federal income tax on PG&E compensation.

The state of California recently passed AB-1249, which was written by Assemblyman James Gallagher and created a similar exemption from state taxes.

Even though AB-1249 now helps some fire victims with their California income taxes, federal taxes are still a big worry for them until the federal bill becomes law.

California passed AB-1249 and SB-1246. This new California legislation says Thomas or Woolsey fire settlement payments don't count as income.

Like AB-1249, SB-1246 only affects the income tax in California. People who lost their homes in the Thomas and Woolsey fires must still pay their federal taxes with the IRS.

Until 2018, legal fees were tax-deductible. After the 2017 Tax Cuts and Jobs Act, you can't deduct many legal fees.

For tax years 2018 through 2025, miscellaneous itemized deductions, which paid for most legal fees, were taken away.

In some cases, plaintiffs may not be able to deduct the fees, even if their lawyers are paid 40% or more of what they get back.