Every time I try to process how to explain taxes to my children, I think about the "Friends" episode when Rachel gets her first paycheck. “Who’s FICA? Why’s he getting all my money?” I remember receiving my first paycheck and wondering the same thing. I did not really understand how taxes work until I was an adult. I wish my parents would have introduced me to FICA and educated me a bit more about taxes in general.
Obviously, the discussion of taxes looks different for various age groups. It is important to make sure your conversations are age-appropriate but provide kids with real answers that will help them understand why taxes are important and necessary. Because let’s face it, taxes will be a part of their lives forever.
No matter what age a child is, they should know:
- Taxes are the ways that the government can collect money from its citizens to pay for things that the people need, like schools and roads. School buses, textbooks, and buildings are also paid for by tax money.
- Taxes have been around for centuries and are collected in different ways.
Parents should be proactive and not reactive – meaning adults can use real-life experiences to teach their children about the tax system. You’ll notice, in our tips, we’ve included different scenarios that offer valuable teaching moments for children.
Ages 5 – 8 years old:
- Explain federal and state tax by discussing the percentage taken out of a paycheck and how those monies are used by the federal and state governments. You don’t need to worry about the specific percentages, but you can use the term deductions.
- Explain Social Security and Medicaid by citing people in your family and inner circle that receive SSA and/or Medicaid assistance. Highlight how this financial aid helps the community and is a way our government takes care of citizens.
Examples and Resources:
- Consider sharing this Schoolhouse Rock video about money and the taxman. The video incorporates facts about taxes into a short musical. This is a great way to appeal to a younger audience and keep their attention.
- Next time you go to the store, save your receipt and show your child how much you paid in taxes. Review where the tax monies are going and explain the different taxes on food, medical equipment, and/or other items purchased. During your discussion, highlight why you must allot for taxes when making a purchase and how you budget that expense into your finances.
Ages 9 – 12 years old (tweens):
- Help your tween become more familiar with other taxes such as property tax and how property value affects the amount of taxes paid.
- Use your own paycheck statement and review the taxes deducted and how your take-home pay is assessed. This is a good opportunity to discuss the difference between net and gross.
Examples and Resources:
- Consider sharing this Junior Tax Facts video with your tween.
- BrainPOP has a wonderful section that highlights different taxes, the IRS, general purchases, income taxes, and much more. BrainPOP requires signup, but the services are free.
- The tween age group is the perfect age to share the process of filing taxes and the deduction and itemization process. While they don’t need to actually do your taxes with you, they are old enough to understand the basics of Turbo Tax and what the software is automating.
- If you purchase a vehicle or home, sharing the tax portion with your child is a great way you can provide a real-life example of how expensive taxes can be. It is also a great example that differentiates the taxes assessed on various purchases.
Ages 13 and up (teens):
- If your child doesn’t have a part-time job, where taxes are withdrawn, this is a great age to calculate/deduct taxes from their chores and other earnings. Set up a separate bank account and put the tax money into that account – once it is calculated. This is a great way to facilitate active conversations with your child about taxes and show them how the actual monies will be deducted.
- When doing your taxes, have your child sit with you and talk them through the process – think of it as ‘take your son or daughter to a tax tutorial day’. This will be an opportunity to discuss dependent deductions, itemization, education credits, donation credits, and more.
Examples and Resources:
- Help your child track expenses and understand the concept of a budget by using real expense charts and spreadsheets. Here is a great PDF example from Scholastic. This is a simple and easy-to-use beginner resource.
- The Mint also has a plethora of information and resources to help teens track their spending, savings, and income. Equipping your teen with a strong financial understanding is a great way to help them succeed later in life.
Taxes are part of our economy and affect everyone in some way, shape or form. It is important to have continuous educational conversations about taxes and finances with children early on.
Understanding taxes and developing healthy financial habits is a process. If parents have progressive age-appropriate conversations with their children, they will set them up for a successful future.