California wildfire victims remain in limbo on federal tax relief

With tax day just weeks away, fire victims are still waiting on legislation to relieve them of federal taxes on payments they’ve received from the Fire Victim Trust, the fund established out of PG&E’s bankruptcy to compensate for homes, businesses and lives lost to wildfires sparked by the utility.

Despite grassroots advocacy and lobbying efforts by the trust to push for federal relief, a bill introduced last year by Reps. Doug LaMalfa, R-Richvale, and Mike Thompson, D-St. Helena, failed. The lawmakers introduced new legislation, HR 176, on Jan. 9, which has yet to progress, though LaMalfa remains hopeful.

Many fire victims will be able to delay filing until October thanks to federal disaster declarations blanketing Northern California amid a severe winter, giving lawmakers a chance to move the legislation before tax bills come due.

“I want to be optimistic,” LaMalfa told The Press Democrat in a recent interview, “but it just depends (if the legislation) bogs down in the Senate or if other things bog it down. It's hard to predict the movement and action of Congress.”

After years of court wrangling and administrative delays, survivors of wildfires, including the 2015 Butte Fire, 2017 North Bay firestorm and the 2018 Camp Fire, have finally started to see long-awaited compensation trickle in.

But, they’ve had to reserve chunks of their settlements for federal taxes both on the money they receive and, under the provisions of the 2017 Tax Cuts and Jobs Act, on the attorneys fees they pay, which can be up to a third of their proceeds.

California lawmakers eliminated state taxes on fire victim settlements last fall.

While the tax burden alone is hefty, its rippling effects impact everything from health insurance to disability and education benefits, not to mention the added time and money necessary to navigate a complex corner of tax law.

Xochitl Pardo-Valdivia and her family, who now live in Healdsburg, lost their rental in the 2017 Tubbs Fire. When they found out how much their settlement would be, Pardo-Valdivia was hopeful they’d have enough to put a down payment on a house. But, payments arrived slowly and piecemeal, and the family accumulated significant debt as they worked to put their lives back together.

“The small amount we received went to paying off our debt and to taxes. The rest will not be enough for a down payment, if we ever get it,” Pardo-Valdivia said.

Since their compensation is counted as income, their earnings registered as $140,000, “which is crazy because we don’t make anything near that,” she said. On top of owing $18,000 in federal taxes, the inflated income also meant Pardo-Valdivia’s daughter, a junior in high school, will likely be ineligible for many financial aid programs for college, she added.

“We’ve talked about the fact that she’ll probably be going to the (junior college) for two years and then she can decide what to do,” Pardo-Valdivia said. “We don’t have enough money to send her to college.”

For Rincon Valley residents Kristin and Kris Timmons, the unexpected blow came in the form of health insurance premiums. Kris Timmons, a plumber, does not receive benefits through his employment, and the couple insures themselves through Covered California, the state’s federal insurance marketplace, at an affordable premium of around $100 a month.

In September 2021, the Timmons received a 30% payment on their trust claim — they lived in Kris’ mother’s home, which burned to the ground along with all their belongings in the Tubbs Fire. When they filed their tax return in 2022, they suddenly owed $8,000 to Covered California as a result of their increased “income,” in other words, their trust payment, on top of a large tax bill.

Around that time, the trust delivered another 15% of their claim. Kristin went online to adjust their income for 2022 in hopes of avoiding another penalty the following tax year.

Doing so caused their monthly premiums to jump up to $600 a month, a sum Kristin said was unjustifiable. The family went without health insurance for the rest of the year. Last December, they re-enrolled with Covered California for 2023, with a premium that had returned to around $160. Then, in February, the trust informed them it would soon pay out another 15%.

The stress her monthly premiums overwhelmed any satisfaction at progress on her claim for her family’s losses in the Tubbs Fire.

“When I got the email from the Fire Victim Trust … I was not happy about it. I immediately thought, ‘well there goes my health care,’” she said. “I’m grateful they’re trying to reimburse us, but the effects that are going unnoticed need to be addressed.”

The Timmons for now are not updating their income with Covered California, in hopes that tax relief passes.

Other fire survivors reached out to The Press Democrat describing the prospect of losing Medi-Cal benefits, getting bumped into higher tax brackets and paying high fees to specialized tax professionals to sort out what is and isn’t taxable, a daunting task.

For instance, while damages for physical injuries and sickness generally aren’t taxable, damages for emotional distress claims are. Late last year, Thompson’s office highlighted various IRS provisions that could be used to reduce taxes in some cases.

The provisions are “super detailed and super factually specific to each case,” said Robert Wood, a tax attorney who has published extensively on settlement taxation and gets many questions from fire victims. “The answer is the rules may not be fair.”

Still, he’s not optimistic about the federal bill after watching other common-sense tax changes fail to make it into law in his four-decade career.

Across the board, fire victims expressed frustration and confusion, beset by yet further obstacles amid their long fight for just compensation. Many have anxiously held off as long as possible on filing taxes. If the legislation passes later in the year, those who’ve already filed will face a new complex and costly process as they file amended returns and wait for refunds.

Fire victims and advocates have pushed to advance tax relief both last and this year. In February, After The Fire USA, a nonprofit that helps communities navigate wildfires and their aftermath, led a delegation of fire survivors and local leaders to lobby for the legislation in Washington, D.C. They met with California and Colorado lawmakers and staffers on both sides of the aisle, as well as key committees, namely the Senate Committee on Finance and the House Committee on Ways & Means, where the bill languished last time.

After the Fire USA CEO Jennifer Gray Thompson said the group was well-received. Their main task was conveying the impacts beyond California and Western states like Colorado of catastrophic wildfires that level entire communities, and underscoring the injustice of the tax code more broadly.

“We have to change the perception (that) it’s a tax cut, and (show) that it’s an extraction from fire victims,” Gray Thompson said. “The damage this will do to communities if it’s not fixed very, very soon is profound.”

On Feb. 2, the Fire Victim Trust Trustee sent letters to House Speaker Kevin McCarthy and Minority Leader Hakeem Jefferies advocating for the legislative fix.

“The monetary compensation received after losing one’s home or business should not be regarded as income in the same way that wages or benefits are,” Trustee Cathy Yanni wrote. “If it is, a series of unintended consequences might take place and perpetuate more barriers and burdens within the recovery process.”

LaMalfa said he and other bill supporters are grappling with how to best craft the legislation to generate broader support. One option is to broaden the measure to provide tax relief on compensation for any major disaster where there is a guilty party — proponents often cited the deadly June 2021 collapse of an apartment building in Miami or poorly-built levees collapsing in the face of gulf state hurricanes.

“Some of our colleagues around other parts of the country are interested in having it broadened,” LaMalfa said.

But widening the bill will increase the size of the lost revenue federal fiscal analysts tag the legislation with, which could make its passage less palatable to some Congress members.

“It all depends how the members decide what that priority is between government income or the folks who are victims of disaster,” LaMalfa said.

Last year’s attempt failed when Senate Minority Leader Mitch McConnell said Republicans would block any inclusion of tax legislation in a sprawling $1.65 trillion spending package. Thompson and LaMalfa were unable to sway the Senate to consider even the relief limited to victims. The bill’s sponsors will now eye a broader tax measure senators are considering for 2023, LaMalfa said.

“Whatever allows us success,” he said.

The slow pace in Congress stands in stark contrast to the urgency many fire victims feel.

“We’re in a holding pattern as fire victims,” former Paradise resident Blake Donald said. “We’re afraid to spend any money because we don't know how much Uncle Sam is going to take out.”

It’s been a long, hard road for Donald since losing his home in the 2018 Camp Fire.

After a week in a Chico Walmart parking lot, he and his wife moved to Las Vegas where their daughter and son-in-law live. His wife’s cancer diagnosis made navigating insurance and the Fire Victim Trust even more difficult. Then, she passed away in December 2021.

The tax burden is yet another unexpected and unwelcome blow. He paid $8,000 in taxes last year and is unsure what he will face this time around. The thought of spending hundreds more to hire an expert felt like adding insult to injury. In February, he was still waiting on tax documents for last year’s payouts. Whether lawmakers would act before he took another tax hit loomed large.

“Its like we’re all in an unknown, and it’s not fair. We should be able to move on with our lives, and we can’t,” Donald said. “We barely get enough from the settlement, then it’s butchered with all the fees we have to pay, and then there’s taxes. We need some clear answers.”

You can reach “In Your Corner” Columnist Marisa Endicott at 707-521-5470 or marisa.endicott@pressdemocrat.com. On Twitter @InYourCornerTPD and Facebook @InYourCornerTPD.

You can reach Staff Writer Andrew Graham at 707-526-8667 or andrew.graham@pressdemocrat.com. On Twitter @AndrewGraham88.