Taxable PG&E Fire Settlement In California
Is The PG&E Fire Settlement Taxable?
Want the easy answer to your question about is your PG&E Fire Settlement taxable?
Well.. let look into this or speak to one of our tax accountants about your settlement from the California PG&E Fire. If you are receiving money from the PG&E fire settlement the award may be taxable to you.
In general, all income is considered taxable unless Congress says it is not (IRC 61). So, when we look at your PG&E settlement offer, we start with the presumption that all of it is taxable and then we walk through the Internal Revenue Code to try and find ways to make it not taxable.
How can our tax accountants help with your settlement from the California PG&E Fire?
Our job will be to review your information and determine what part of your settlement payout can be nontaxable under the tax laws so that you are able to plan accordingly for income taxes.
First, we need to know what your award is for. The PG&E Fire Trust has been providing Determination
Notices that detail the breakdown of your settlement award (e.g., Emotional Distress-Nuisance, Emotional
Distress-Zone of Danger, Personal Injury, Real Property, Loss of Income, Interest, etc.). This should be
provided to you by your attorney. If you didn’t use an attorney, the Trust should provide this notice to you
directly. Some attorneys are recommending that your payout will not be taxable if they don’t provide this
information to you but that is incorrect. It is important that we obtain the details of your settlement proceeds
in order to determine what is taxable. If your attorney has subsequently requested a redetermination of
your settlement, we will need this notice to determine any changes in your proceeds.
Next, we need to determine whether each part is includable or excludable from income. You will note that
the PG&E Fire Settlement taxation proceeds follow the same tax guidelines as your insurance proceeds
payouts. The following are common settlement proceeds:
• Physical Injury – payments for physical injury or sickness are nontaxable and excludable from
income. This must be a physical injury meaning there was bodily harm.
• Emotional Distress – payments for emotional distress are taxable and includable in income unless
the emotional distress is a result of the physical injury. The physical injury must have happened on
the day of the fire and not after-the-fact or due to having emotional distress.
• Personal Property Settlements – payments for your residential real property could be fully taxable
if you are unable to exclude the gain as a personal residence exclusion ($250,000 single/$500,000
married filing jointly). If you have already received insurance proceeds for your property, we will
need to factor this in the equation to determine if you are still within the gain exclusion amount.
• Additional Living Expenses (ALE) – payments for additional ALE are nontaxable and excludable
from income as a result of the fire being located in a federal declared disaster area.
• Personal Contents – payments for your personal contents are nontaxable and excludable from
income for the same reason as ALE payments.
• Business Property Settlements – payments for your business property settlements could be fully
taxable. Some of these payments may be taxable as capital gain income depending on the type of
asset. You may be able to defer the gain by meeting the requirements of an involuntary conversion
under Internal Revenue Code Section 1033. There are specific rules and timelines for the 1033
exchange that we may have already addressed with your insurance proceeds. We will need to know
if you are planning on utilizing the 1033 election so that we can plan accordingly.
• Business Loss of Income – payments for business loss of income are taxable and reported as
business income.
• Rental Loss of Income – payments for rental loss of income are taxable and reported as
ordinary/rental income.
• Interest – interest is taxable as ordinary income.
With respect to attorney fees, most of the PG&E fire lawsuits are contingent fee lawsuits which means that
the attorney fees cannot be excluded from the gross award. So, if you receive $100,000 and give 30% to
your attorney, you are still taxed on the full $100,000. Further, the Tax Cuts and Jobs Act eliminated the
tax deduction for attorney fees through 2025, so there is no deduction available for the attorney fees on
your Federal Income Tax Return (attorney fees are still deductible on the California Return). Some
exceptions to this include being able to deduct attorney fees against loss of income received or if part of
your award receives capital gain treatment, then a portion of the fees can be added to the basis of the
property creating a deduction.
The Taxable PG&E trust settlement payments out to individuals
The PG&E trust has already started making settlement payments out to individuals. The first installment is
30% of your total settlement amount with the rest to be paid out at a later date. If this is the only payment
you receive in 2021, you are only responsible for paying taxes on the taxable portion of that payment.
We realize that this is a very complex tax situation, and you will probably have additional questions for us.
If you need us to run any tax projections, we recommend waiting until you receive your Determination or
Redetermination Notice before contacting us so that we have some numbers to work with. On basic
settlement scenarios, we have been recommending setting aside at least 30% of the gross payout for
taxes. This should be enough to cover the taxes, but we would have to run projections to make sure. Please
don’t hesitate to contact us if you need any additional help. We are here to assist you through this process
to the end.
