A Powerful, Rapidly Phasing-Out Deduction That Will Drive Refunds in 2026

The 2025 tax year (filed in 2026) introduces a major new tax benefit for millions of households: the Working Families Deduction (WFD). This deduction is aimed specifically at low-income workers, giving them a temporary but meaningful reduction in taxable income during a high-inflation period.

While many new provisions under the OBBB Act benefit a broad range of taxpayers, the WFD is targeted. It is intentionally designed to phase out quickly as income rises, meaning it will primarily help those with modest earnings who need refund relief the most.

If you are a lower-income filer, a part-time worker, a single parent, or someone who earned only a small amount of wages in 2025, this new deduction may become one of your biggest refund boosters.

What Is the Working Families Deduction?

The Working Families Deduction (WFD) is a new temporary tax deduction designed to reduce taxable income for qualifying households. Unlike refundable credits such as the EITC, the WFD works by lowering the income the IRS uses to calculate your tax liability.

This deduction:

• Targets low-income workers
• Phases out rapidly as income increases
• Works alongside the EITC and Child Tax Credit
• Helps boost refund sizes for taxpayers with lower earnings
• Only applies for the 2025 tax year (unless extended)

The WFD is part of the broader package of new refund-related tax changes intended to support families during economic transition.

Why the WFD Matters for the 2026 Refund Season

For many low-income workers, even small deductions can have a major impact because:

• They reduce or eliminate taxable income
• They may increase refundable credit eligibility
• They can help qualify for, or increase, the Earned Income Tax Credit
• They lower the amount of income considered in phase-out calculations for other credits

Because of its structure, the WFD will be one of the most important refund boosters for lower-income households, especially single parents and part-time workers.

Who Qualifies for the Working Families Deduction?

The WFD has strict eligibility rules. To qualify, you must:

1. Have low or moderate earned income

The WFD is designed for taxpayers with income below a specific threshold. Exact limits depend on filing status but are intentionally low.

2. Have earned income from wages or self-employment

Investment-only income does not qualify.

3. File a federal income tax return

Even if you normally do not have to file, you must file a return to claim the WFD.

4. Not be claimed as someone else’s dependent

Independent filers only.

5. Fall within the phase-out range

Once income exceeds the cutoff, the deduction decreases quickly and then disappears entirely.

Because the deduction phases out rapidly, taxpayers slightly above the threshold will not qualify.

How Much Is the Working Families Deduction Worth?

The WFD provides a deduction that reduces taxable income. The exact amount varies based on:

• Filing status
• Earned income level
• Number of dependents in some cases
• Interaction with other deductions

For eligible filers, the deduction can significantly lower or eliminate taxable income, which:

• Increases refunds
• Reduces withholding-related overpayments
• Maximizes refundable credits
• Helps offset inflation and wages lost to part-time or unstable employment

For many low-income workers, the WFD will be a key driver of larger 2026 refunds.

How the WFD Phases Out

Unlike broad deductions such as the standard deduction, the WFD includes a steep phase-out. This means:

• The deduction is fully available for those under the income threshold
• It decreases quickly as income rises
• It disappears entirely once income exceeds the cutoff

This rapid phase-out ensures the deduction benefits:

• Part-time workers
• Seasonal workers
• Single parents with modest wages
• Low-income married couples
• Workers coming off unemployment
• Households with significant income fluctuations

If you earned very little income in 2025, you are most likely to qualify for the full WFD.

How the Working Families Deduction Interacts With the EITC

For many households, both the WFD and the Earned Income Tax Credit (EITC) will apply, making them extremely powerful when combined.

The WFD can:

• Reduce taxable income
• Improve EITC eligibility
• Prevent income from falling into a higher phase-out range
• Increase the refundable EITC amount for certain workers

This makes the WFD particularly valuable for:

• Lower-income families with children
• Single filers with modest wages
• Workers with fluctuating income from year to year

Together, the WFD and EITC can dramatically boost refund amounts.

How to Claim the Working Families Deduction

Claiming the WFD involves:

1. Filing a federal income tax return

Even if your income is below the filing threshold, you must file to claim the deduction.

2. Entering earned income accurately

This includes wages, tips, and self-employment income.

3. Completing the WFD worksheet

Tax software will handle this automatically.

4. Reporting dependents correctly (if applicable)

Incorrect dependent information can cause refund delays.

5. Providing all required income documentation

W-2 forms, 1099-NEC forms, and business income records must match IRS data.

Once processed, the IRS will apply the deduction and adjust your taxable income accordingly.

How the WFD Appears on IRS Transcripts

When the WFD is applied, taxpayers may see:

• TC 150 – Return filed
• TC 806 – W-2 withholding applied
• TC 570 – Refund hold (common during credit verification)
• TC 971 – Additional review or notice issued
• TC 846 – Refund issued after verification

Because the WFD affects income calculations that interact with the EITC, it may trigger routine verification checks.

Who Benefits the Most From the Working Families Deduction?

1. Single parents

Low-income single filers with children benefit heavily due to stacked eligibility for the WFD and EITC.

2. Part-time and seasonal workers

Workers with inconsistent employment qualify most often for the full WFD.

3. Married couples with one low-income earner

A single income often falls below the phase-out range.

4. Workers recovering from unemployment

Especially those who returned to work late in the year.

5. Seniors working part-time

Some older workers may qualify if income stays low enough.

The Working Families Deduction (WFD) is one of the most important new refund boosters for the 2026 tax season. Designed for low-income workers with modest wages, the WFD reduces taxable income, improves eligibility for refundable credits, and significantly increases refunds for families that need the relief most.

If your income in 2025 is low or inconsistent—or if you are a single parent, part-time worker, or someone returning to the workforce—the WFD may be one of the biggest new tax breaks available to you.

Use the WFD alongside the Earned Income Tax Credit, Child Tax Credit, and standard deductions to maximize your refund.