My first job was working at a local restaurant “under the table” at the age of 15. At the end of each four-hour shift, the owner would take a $20 bill out of the register and hand it to me. I loved it.
It was a little different when I received my first paycheck. It was quite a shock to see all that money being taken out.
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If you have kids and want to soften that blow (or not — it’s a great learning experience), it helps to introduce the idea of taxes early on. Explaining what taxes are, how they work and why they’re important is crucial fore your kids to understand how their money will be impacted.
Even if your child is nowhere near teenage years, it’s never too early to talk about taxes.
Here are four easy ways to explain taxes to kids:
Explain Why We Have Taxes
It’s not enough to just tell your child that taxes are money the government takes from your paycheck. It’s important to talk about why there are taxes in the first place. That way, there’s a better understanding that taxes are used to help the community and the country.
You can start with the mechanics of taxes. You can talk about how the government collects taxes, such as an extra charge when you go shopping, or how every couple of months you pay property taxes. If your teen has a job, explain that taxes are withheld from their paycheck. You can explain that companies pay taxes on their profits, too.
You can also talk a little about enforcement and how the IRS might audit taxpayers they believe aren’t paying the proper amount.
Once you’ve done that, your child might naturally ask where that money goes. Be as specific as possible when explaining so they can see how they directly benefit. For example, you can talk about the library and how taxes paid go toward purchasing books they can then borrow. Or how the money is used to pay for police officers that protect people daily.
Look at a Paycheck Together
If your teen has a job, take one of their paychecks and point out how much is being taken out in taxes. Alternatively, you can even use your paycheck (if you feel comfortable) for this conversation.
You don’t need to explain every item on the paycheck, but you’ll want them to understand the basics like net and gross pay. Explain that the gross amount is what you earned before taxes, and net pay is after the taxes are taken out.
Then, head over to the taxes section to see how it’s broken down. This would be a good time to explain that there are federal, state and local taxes. You can even go into Social Security and Medicare, and why those will benefit them down the road.
Represent Taxes Visually
If your child is too young to understand the breakdown of a paycheck, find a way to represent it tangibly. If your child receives an allowance, teach them what net and gross pay are by keeping part of their “paycheck.” If that sounds too extreme, enlist the entire family in this process. Every member of the family needs to contribute a certain percentage of their paycheck or allowance into a fund, or “taxes.”
To remind your child visually, you can keep the money in a jar, or draw out a chart to show how much money is in a dedicated account. After a set time, you can vote and decide where the money will be spent by “the government.”
For example, you can choose to put the money toward Christmas gifts, or even a family vacation. If you feel inclined, ask your kids to see if they want to donate the money to a worthy cause, such as a local charity or purchasing items for a family in need.
Revisit Taxes Regularly
You don’t need to find a specific time to sit your child down to explain taxes. If you treat it as a “serious” talk, your child might be turned off. Instead, try to integrate it into everyday life rather than making it a “thing.”
For example, you can talk about construction workers on public roads when you drive past their work zones. You can explain how your taxes help pay to maintain the roads and the workers’ jobs are to keep them safe.
Yes, taxes aren’t exactly a fun subject but talking about them is important. You can introduce tax trivia too, to help try to make it a little more entertaining. If you can elicit a sense of curiosity, the easier it will be for you to have daily conversations about money in general and not just taxes.
Click here to read more about important finance lessons kids should be taught in school — but aren’t.