When I was a kid, I saved to buy a very special bracelet for my mother. Every time I was in the store I looked at it—I knew she would love it.
I saved and saved, and when I had enough I proudly took my money to the store to buy the gift … but I still couldn’t afford it, because I didn’t know about the sales tax.
There are several types of taxes, but the one that most affects your kid directly is sales tax, the surcharge added onto specific items, like candy, clothes and, of course, toys, at the time they are purchased. Sales tax will be your child’s first encounter with taxes.
We don’t want our children to have the same experience I did, or to recoil in shock when they get their first paycheck at a summer job and notice a big chunk of their money is missing. We need to teach them why there are taxes, how they’re collected, who gets the benefit—basically, the other side of the story.
Here are three ways you can do just that:
1. Explain the Basics
I usually start teaching taxes around age 10, but your child might be ready earlier or later. Whether your child asks you what taxes are, or you take the initiative to explain on your own, saying “taxes are money you have to give away” isn’t going to cut it.
Here are some points to make instead:
- Taxes come from all different places. The government collects taxes in different ways (for example, an extra charge when you buy certain goods like books and sports equipment).
- Taxes are part of working. People pay taxes on the money they earn from their jobs, and companies pay taxes on the profits they make.
- Taxes are part of owning a home or business. People who own buildings pay taxes on the property that the buildings are on.
- Taxes are taken from gifts too. If you inherit money or win the lottery, you pay taxes on what you receive.
Make sure to emphasize that all the money collected in taxes pays for things that benefit everybody, including your family.
2. Seize Teachable Moments
You don’t have to teach children about taxes during a serious talk at the kitchen table. For young children, use everyday things they encounter to bring up the subject. On a walk together, you might see streets, trees, police officers, fire hydrants, garbage cans and maybe a library or a school. Explain that “these are good and important things that people help to pay for by paying taxes.”
When my son Rhett was young, he was in the backseat of the car when I drove through the “exact change” lane of a toll plaza. I tossed my coins into the collection basket, the toll gate lifted, and my son yelled, “We won! We won!” Always ready to use a teachable moment about money, I explained: “We pay tolls to help pay for the nice roads that we drive our cars on.” Tolls are another form of taxes that are fair because people who use the roads pay more.
When you’re riding in your car, point out buildings, objects and businesses, and ask your kids who pays for them: taxes or private individuals? You can also play in reverse and challenge them by asking, “Find something paid for by taxes.”
3. Create a Tax Jar
By now your kids have some familiarity with taxes. You can put this knowledge into practice by establishing a family tax that goes into a “tax jar.” Each member of the family must contribute a percentage of their income or allowance (you can keep these percentages low), and everyone in the family gets to vote on how the tax money will be spent every few months of saving. Label the tax jar and store it in the kitchen (not the Cayman Islands … that’s a different tax lesson).
A few years back, my kids wanted to take a trip to Disney World. We figured out how much that would cost and how long it would take to have enough in the tax jar. They quickly determined they would be out of college long before we had saved that much, so we adjusted our goal to a family pizza night. When pizza night came around, the kids were allowed two special toppings each (“No, Rhett. Sprinkles are still not considered a pizza topping.”).
Nobody enjoys paying taxes, but next time you’re out with your kids and you encounter a fire truck rushing to the rescue, point it out to your children and say, “Look! There goes our tax money being used to help someone who really needs help.”