The Federal Disaster Tax Relief Act of 2025 aims to provide significant tax relief for individuals experiencing losses from major disasters. It amends the Internal Revenue Code to allow individuals to deduct "qualified net disaster losses" without being subject to the typical 10 percent adjusted gross income (AGI) limitation that usually applies to personal casualty losses. These qualified disaster losses are defined as those arising in a Presidentially-declared major disaster area with an incident period between July 4, 2025, and January 1, 2027. This provision ensures that more of an individual's disaster-related losses can be claimed.

A crucial change introduced by the bill is the creation of a "disaster loss deduction," which allows individuals to claim these qualified net disaster losses even if they choose to take the standard deduction, rather than itemizing. This means taxpayers will not need to forgo the standard deduction to benefit from disaster loss relief. Furthermore, this disaster loss deduction will not be considered for purposes of the alternative minimum tax, preventing it from inadvertently increasing a taxpayer's AMT liability. These amendments apply to losses incurred in taxable years beginning after December 31, 2024.

The bill also codifies and extends the exclusion from gross income for certain compensation received due to wildfires. It establishes a new section in the tax code to exclude "qualified wildfire relief payments" from an individual's gross income. These payments cover compensation for various losses, expenses, or damages, including lost wages, personal injury, or emotional distress, resulting from a Federally declared wildfire disaster that occurred after December 31, 2014, provided they are not compensated by insurance. To prevent double benefits, no deduction, credit, or basis increase is allowed for expenditures covered by these excluded payments. This exclusion applies to payments received in taxable years beginning after December 31, 2025, and before January 1, 2031.