How to Introduce the Concept of Taxes to Kids
Our tax system is complicated, and it can be difficult even for adults to understand. Trying to explain to your kids what a tax is, how to budget for it, or how to file paperwork, refunds, and taxes owed is enough to give parents a headache.
It does not have to be that difficult, though. In four steps, you can teach your kids about taxes in a way that they will understand.
The first thing is to discuss with your child exactly what taxes are and and what they are used for. For example, if there is a city park or playground where they like to go, you can explain that everyone in the community contributes money that helped build the park and still helps to maintain it
The younger children are, the simpler you should keep the details. In addition to the park example, you can elaborate by explaining that their school, their teachers, policemen, firefighters, and others all are paid for by money everyone contributes.
The older kids become, the more detailed your explanations can become. By the time they are in middle school, you should be able to start differentiating between different levels of government—local, state, federal, etc.—and different types of taxes—sales, property, income, FICA, etc.
Practice Paying Taxes
Introducing kids to the concept of taxes by withholding a percentage of their allowances. It is a great way to help them understand that when they hit the real world, they will not get the full amount of their salary or hourly wage. Instead, a percentage will go to the government.
If you have two children in a family of four and subscribe to a streaming service that costs $10 per month, make it clear to both kids that $2.50 of what you withhold from each of them each month goes toward paying for their share of that service.
Because you're playing the role of the government, explain clearly where the money is going so the kids understand the role of taxes. It could be their contribution to things like utilities, groceries, or car maintenance. Pick something that costs money and is used for the good of everyone in the house.
One of the benefits of introducing children to taxes is that it forces them to learn how to budget with taxes in mind. For younger children with allowances, this can be a simple lesson about math. For example, by withholding a percentage of their allowance, you can help them practice calculating the difference between gross pay and net pay.
Older children with jobs also need to learn how to budget with their net pay in mind. They also likely have expenses that are their own responsibilities that need to be factored into their budgets. For example, they might have to pay for a cellphone and car insurance while also saving for college.
In addition to budgeting, have older kids track expenses to help them see where they can save more. For example, when a teenager with a job who realizes he's spending $50 per week on fast food can add that line item to the expenses section of his budget—and hopefully reduce the expense in the process.
For younger children, a simple budget that lists gross pay, net pay, savings, and spending money should be sufficient. Worry less about complexities and just focus on helping them get into the habit of budgeting. Older children should be expected to develop more detailed budgets that drill deeper into each line item.
Children with jobs will need to file a tax return if they earn enough money or if their employer withheld income taxes. Parents should be proactive about this when teens get their first jobs. Most kids will understand little about the forms they fill out with their employers when they are hired, so parents should go over the process with their kids so they understand the purpose of W-4 form, for example.
Parents filing their own taxes can allow older children to observe and ask questions—assuming parents are comfortable sharing this much financial detail with their children. Doing so can help kids understand the process.
Once January arrives, parents should be ready to explain to their working children about when and what they should expect when they receive their W-2 forms. Once they've received this, parents can help them with the process of filing their taxes.