In a significant development following the catastrophic 2025 Eaton Fire in Altadena, California, many survivors have opted to accept an immediate settlement from the utility company alleged to have sparked the blaze. This decision allows them to receive compensation more quickly, helping them either rebuild their homes or relocate.

However, there’s a potential financial snag. Unless Congress passes new legislation, these settlements could be taxed as income, significantly reducing the funds available to survivors and potentially affecting their eligibility for other government assistance.

Bree Jensen, who serves as the communications director for the Eaton Fire Long-Term Recovery Group, described the community’s reaction to the tax implications as one of “terrifying disbelief.”

This issue isn’t isolated to Altadena. Other fire survivors in states like Colorado, Hawaii, and Oregon face similar financial uncertainty after a previous tax exemption on wildfire-related compensation lapsed at the end of 2025.

Historically, Congress has provided tax relief for wildfire settlements, but such measures have been temporary and challenging to enact. Recently, a bipartisan bill aimed at extending this tax relief successfully advanced through a House committee. Nevertheless, the timeline for a full House vote and subsequent Senate consideration remains uncertain, leaving many survivors in a precarious financial position.

One Altadena homeowner, who requested anonymity due to concerns over her anticipated $700,000 settlement, shared her apprehension. “We have to assume we don’t have that money,” she explained. As a result, she and others are making cost-cutting decisions, such as opting for less expensive building materials and foregoing solar energy installations. If taxed, she estimates that 37% of her settlement could be lost to taxes.

The homeowner hoped accepting a settlement would get her family home faster, after she, her husband and their four pets spent more than a year hopping between relatives’ houses and rentals.

“All we wanted was to rebuild a comfortable house and get out of the situation we were in,” she said, adding their construction costs alone are estimated to reach $1 million.

As survivors watch lawmakers lock horns over the Iran war and the record-long Department of Homeland Security shutdown, some worry extending disaster tax relief will be de-prioritized.

“People have low expectations of anything actually getting done,” said Jenn Kaaoush, a 2021 Marshall Fire survivor and town council member in Superior, Colorado.

Compensation has become crucial to rebuilding

Utility equipment is believed to have sparked some of the deadliest and most destructive fires in recent years. Multibillion-dollar settlements have become common after these fires but take years to resolve.

As construction costs soar and insurance becomes more expensive and difficult to secure, compensation from lawsuits has become a critical component of how many households start over.

“It’s the difference between towns getting rebuilt and not getting rebuilt, quite frankly,” said attorney Doug Boxer, who has represented more than 17,000 Californians in cases against utilities and is part of the LA Fire Justice coalition suing Southern California Edison and its parent company, Edison International, on behalf of more than 2,000 clients.

SCE and Edison International have acknowledged their power equipment may have sparked the Eaton Fire, which destroyed 9,000 structures and killed 19 people. The utility last year announced a compensation program for those impacted, promising fast payments based on the value of one’s losses, as well as an additional premium for not joining litigation against the utility.

More than 2,800 households have applied for the compensation program. Thousands more are joining lawsuits against the utility. An investigation into the Eaton Fire’s cause is ongoing.

Households can’t afford to lose a chunk of their payments to taxes, said Jensen, whose home also burned. “It sounds like a lot of money, but not in regards to how expensive it is to actually build in the community.”

A bipartisan bill would extend tax relief

Payments related to federally declared wildfire disasters from 2015 through 2026 would not count toward taxable income, according to legislation approved unanimously by the House Ways and Means Committee last month. That would apply to payouts received in 2026 and after.

The measure would extend expanded tax relief for property losses from federal disasters through this year, a provision that helped attract bipartisan support from lawmakers representing states vulnerable to hurricanes and other extreme weather.

Florida Rep. Greg Steube — a Republican who championed the 2024 tax relief bill and introduced its successor with fellow Republican Rep. Doug LaMalfa, now deceased, and with Democratic Reps. Mike Thompson and Jimmy Panetta of California — told The Associated Press he expects the legislation to ultimately pass, but he acknowledged “the exact timeline remains uncertain.”

Steube, whose southwest Florida constituents could benefit from the provision deducting personal casualty losses, has vowed to push the law forward.

Two similar bills were introduced in the Senate, but further action has not been taken.

After lobbying for the past and present bills as executive director of the survivor advocacy nonprofit After The Fire, Jennifer Gray Thompson said she believes lawmakers understand the bipartisan nature of disaster tax relief.

“As these disasters come in quick succession, we are going to have to adapt on all levels, and our tax code will have to adapt along with it,” she said.

Still, Gray Thompson said she can’t be sure when action will come.

Survivors in Colorado, Hawaii and Oregon would also be impacted

Maui residents face similar challenges as they await payments from a $4 billion settlement with Hawaiian Electric. Only about 180 homes have been rebuilt in Lahaina among 2,200 structures destroyed.

What Lahaina survivors need most is “certainty,” Maui County Mayor Richard Bissen wrote to lawmakers in a letter supporting tax relief.

While the majority of destroyed homes in Superior have been rebuilt, Kaaoush, the town council member, said most survivors are still catching up financially after finding themselves underinsured.

She also worries that her constituents could be knocked off income-qualified government benefits for food, health care or veterans’ support if their wildfire payments count as income.

“This has second- and third-order impacts on their life that will do harm,” Kaaoush said.

Gray Thompson cautioned that while survivors waiting for relief can defer taxes or amend past returns, resolving issues with government programs, such as qualifying for college financial aid, is much harder. “There’s no way to undo that,” she said.

Meanwhile, many in Altadena feel they’re continually facing new obstacles to returning home, said another resident who also lost his home and insisted on anonymity because of ongoing litigation.

Being taxed “would just add more pain and suffering for us, really,” he said.