Taxes are an essential part of finances. As you are teaching your children lessons on how to save, spend, and invest, it’s also important to include instruction on the least favorite, yet nonnegotiable part of money management — taxes. Here are a few ideas on how to teach your kids how the system works:
Tax basics
Paying taxes is the responsibility of every person, so even though they are zero fun, at least your child will know everyone is in the tax game together.
“Remember to explain that plan is by design, so that no person is more or less responsible for government saving and spending,” advises Kate Kershner, writer for HowStuffWorks.com.
And paying taxes isn’t reserved for those earning a paycheck or when tax returns are due each April, so you can start the tax lesson early.
“Kids experience taxes way before they start working — the first time they buy something, for example,” according to Dina Roth Port and Hiranmayi Srinivasan, writers for Parents.com.
Sales tax is attached to everything your kid purchases, so they’ve been handling their financial responsibility even if they didn’t realize it!
Federal responsibility
One of the most exciting parts about growing up is the chance to get a job and earn your own money, but that excitement can quickly turn to disappointment when faced with the take-home amount. Taxes do take their toll, after all, and it can be a sobering realization to your teen. It’s best to prepare them for the shock!
“Before you even get your first paycheck, it’s important to understand how income tax works. When a company offers you a starting salary, you need to calculate whether that salary will give you enough money after taxes to meet your financial obligations — and, with smart planning, meet your savings and retirement goals as well,” advises Amy Fontinelle, writer for Investopedia.com.
You can show your child what they can expect to pay in taxes with the help from an online calculator. It will help them understand the difference between gross pay, the amount earmarked for taxes, and net pay.
Tax filing
Even if your child doesn’t earn a substantial income from their part-time job, you can still show them what their financial future will include as a grown-up with your tax return filing. If you file your own taxes, you can walk them through filling out the form, explaining how deductions work and what you may get back from or owe to the federal and state governments. If you have an accountant or tax professional do the work, include your child on your meetings. Tell them why and how important it is to file taxes each year on time so your children won’t suffer the wrath of prosecution.
“While the youngsters might not fully grasp the inconvenience of an audit, you could certainly explain to them that if there is a mistake on their taxes, the government will make them go through their homework — line by line — to ensure every single item is correct. The punishment is both paying more taxes than they originally paid — plus a penalty — and the time-consuming cost of the audit itself,” warns Kershner.
The subject of taxes is complicated — even adults struggle with it — so go slowly when you’re teaching your kids. Allow them to ask questions and involve them in the process of filing a return so they see firsthand how to do it. And always consult your tax advisor for additional questions.