Teaching your kids about important financial topics like taxes can be fun and engaging! Many parents struggle to start conversations with kids about sensitive topics and personal finance has often been looked at as one of the sensitive topics that isn’t discussed publicly. But, current generations are taking charge of our personal finances and working towards a bright future for our kids by having conversations about how to become adults successfully.
How can we teach our children about taxes and their importance in society? Let’s discuss!
When Should Kids Start Learning About Taxes?
Kids can start understanding simple tax lessons in elementary school. I have had conversations with my 4-year-old niece about taxes and used the library, playground at the local school, and roads as examples to explain to her how taxes are used to benefit all of us.
Now, when we drive around town, she asks about money, taxes, business, and how they are all related to each other. She has asked the cashier at the store about why some foods in our area are taxed at the grocery store and why others are not. Children understand a lot of what we do in our daily lives as adults and watch our actions. We teach them daily, sometimes without even realizing it!
Let’s talk about how to intentionally teach kids about taxes and good habits!
How to Explain What Taxes Are and How They Work
Use real-life examples because this lesson will stay in your child’s mind, and it’s a great bonding opportunity. Many of us go through our lives without thinking about what we are doing because it’s just become a habit, so we go through the motions. Take a step back and consider that these daily activities for us are not a habit for our kids yet. Find ways to offer them opportunities to learn.
Example 1: If you take your child to the store with you, give them money to pay for an item themselves in cash and show them on the receipt how much was charged for taxes. It helps if the item being purchased is a round number like $1 or $5.
Example 2: Consider showing your child your paystub from your job and how much is taken out for taxes. Explain the different types of taxes and what the government uses the money for. This helps kids prepare themselves for when they start paying taxes from their first job or business venture.
Example 3: If you have an investment account, you can show your child the statements issued for tax purposes and explain to them how taxes are paid on capital gains.
Example 4: Tax professionals are often more than happy to have conversations with kids about taxes and what to expect when they start earning money on their own. My accountant has sat down with my nephews twice, and we have paid him for an hour of his time. This has been beneficial in helping them understand how tax credits and deductions work.
How to Explain the Importance of Taxes
When you run errands, take your children with you and involve them in the process as you use public resources that are funded by taxes. Have conversations about how roads, parks, schools, hospitals, and the post office are paid for with taxes. Explain how each of these makes our lives better. This will help plant the seed that taxes are necessary for our society.
If your town or city has public meetings about taxes or happenings in your community, consider taking your older children with you to hear how citizens can take part in voicing their thoughts on taxes, what taxes are used for, and any proposed tax increases.
When you receive a promotion or pay increase at your job, talk with your family about how this might change the amount of taxes you owe. This opens up a conversation about the 7 tax brackets and how they work. Not everyone knows that your annual income isn’t taxed at your federal tax bracket, but that income is taxed in stages.
To determine how best to plan for taxes, the state taxes should be discussed for your specific state or those that your child may be considering attending college. Talk about income, property, and sales taxes that impact how money is earned and spent in your state.
Some areas have shelters or food pantries sponsored by local government organizations and funded by taxes. Often, the public is allowed to volunteer or participate in food drives. Drop-offs to citizens who cannot leave their homes to attend food banks require volunteers.
We have taken the kids in our family for years to help out at these locations many times throughout the years, especially during holidays. My parents took us to participate when I was a child, and I witnessed firsthand the importance of paying taxes so that those who cannot afford food or shelter on their own can be safe and healthy.
How to Set a Good Example
- Be mindful of how you speak about taxes in front of children. Experts agree that none of us really like paying taxes, but they really are necessary to maintain the society we live in. Our country really wouldn’t survive if we didn’t have taxes. Kids listen to what we say and how we say it to form their own opinions and thoughts on adult topics.
- File your taxes on time and pay your bill in total if you owe taxes rather than qualifying for a return. Showing children that you’re taking your responsibilities seriously while they are young and watching how you handle your money will set a great example of how they should handle money and taxes as they age.
- Explain to them the different taxes and why we pay them. Knowing that taxes are levied on our actions helps plan a tax strategy. For instance, knowing that cashing out a retirement account before retirement age could cost money in taxes and penalties is good to know before choosing to cash out the account.
- Have open conversations and make sure that your kids know that they can come to you to talk about taxes, money, personal finance, or anything they are facing in their lives. We live in a time when we are starting to talk about topics that were previously “too private” to speak of (like finances and taxes) and we have the ability to research to find answers to questions that we have. Encourage conversations that will help the children in your life grow in their understanding.
Tax Definitions To Go Over With Your Kids
- Taxes: Sum of money paid by citizens to the government that funds public goods and services.
- Paystub: Paper or online transaction that shows the amount earned for that wage period and the amount of money held back for taxes, insurance, and retirement account.
- Investment account: Holds assets such as stocks, ETFs, bonds, and mutual funds intended to be held until after retirement age.
- Capital gains: An increase in the value of an asset that is taxed when the asset is sold.
- Tax credits: Reduces the amount of taxes owed by a taxpayer.
- Tax deductions: Reduces taxable income, which can change the tax bracket of an earner or household.
- Income tax: Taxes imposed on an individual or business based on how much money has been earned or made for that year.
- Property tax: Taxes levied on property such as real estate or vehicles based on the estimated value determined by the tax assessor’s office.
- Sales tax: Taxes on the purchases of goods or services that is also known as a consumption tax.
Books and Resources to Teach Kids About Taxes
Here are some of our favorite resources to teach kids about taxes. Head over to our entire kids’ money books library for more great reads for parents and kids! You can also download our Kids’ Money worksheet on completing tax forms.
Heads Up Money. This is intended for ages 10 and up because it discusses complex financial concepts that are simple to understand. Topics covered include taxes, supply and demand, financial crises, globalization, and ethical trade. Learn about business and the economy in ways that most adults don’t know about.
If You Made a Million. This book was originally released in 1989 and has helped generations of children understand money using fun stories like babysitting a giant’s baby for a side hustle. The intended audience is 4-8 years old, and the author does a great job of teaching earning, taxes, dividend income, and compound interest.
The Everything Kids’ Money Book: Earn it, save it, and watch it grow! This book teaches kids ages 6-10 how credit cards work, tax basics, personal finance principles, currency, and what money is used for.
Understanding Taxes Teacher Site. The IRS created this resource as a resource for teachers and parents to teach children and teens about taxes. Worksheets can be downloaded to print for activities.
The Kid’s Guide to Money: Earning It, Saving It, Spending It, Growing It, Sharing It. Aimed at kids ages 9-12, this book teaches the principles of finding a job, paying for taxes, how much to pay in taxes, how to build businesses, ways to advertise your business, how banks work, effective budgeting, and investments.