Raising Money-Savvy Kids: Tips for Teaching Your Children About Taxes

Financial education is a crucial aspect of preparing children for successful adulthood. Parents can help kids develop the skills and knowledge necessary to make informed decisions about their finances by teaching kids about important financial topics such as taxes.

Taxes are an inevitable part of life and significantly impact personal finances, so kids need to learn about them early on. Parents can help them understand the purpose of taxes, how they are calculated, and how they are used to fund programs and services. Moreover, teaching children about taxes can help them develop good habits, such as budgeting, saving, and planning for the future. It can also help them avoid common financial pitfalls, such as failing to file taxes or needing to understand their tax obligations.

Before children start working, discussions about how libraries, schools, and roads are financed can help them understand how taxes are used. Intentionally teaching kids about taxes can help them create good habits.

Real-life examples tend to impress the most. When shopping and paying for goods, you can show them purchase receipts to show how sales tax is paid. Showing a pay stub from a job illustrates how taxes are withheld from wages. Showing and explaining statements from investment accounts can help explain the underlying investment and create discussion on income taxes paid on the investment earnings.

One of the most critical and transparent lessons is having children prepare their tax returns independently when they start working. An item to note for kids when they begin working:

Even as a dependent, they are entitled to the Standard Deduction on their wages. The current Standard Deduction is $12,950 and is adjusted annually. This means that the child can earn up to the Standard Deduction amount before they must file a tax return. However, if the child earns less than the Standard Deduction, they may want to file to recover any taxes that were withheld from their pay. If the child makes less than the standard deduction, you may want to help them fill out their W-4 when they start working to claim “Exempt” status so that no tax is withheld and no tax return needs to be filed.

In the case where the child needs to file because they earned more than the Standard Deduction or to recover withheld taxes, here are a couple of pointers.

1. Be sure to check the box on the tax return that they can be claimed as a dependent on another person’s tax return. If this box is not checked and the parent claims the child as a dependent, the parent’s tax return will be rejected when attempting to file.
2. The IRS publishes a list of companies offering free tax filing services that the child can use to prepare their tax returns online for free. Use this link to access the IRS free service: https://www.irs.gov/filing/free-file-do-your-federal-taxes-for-free The IRS website will assist not only by directing you to these services but will also walk you through several scenarios to guide you the most appropriate service for your circumstances.

Lastly, here are a few additional pieces of important information to teach your children about taxes:

1. Explain the different types of taxes. In addition to sales and income taxes, there are also property taxes, excise taxes, and other types. Discussing the different types of taxes can help kids understand how taxes are used to fund various programs and services.
2. Discuss the consequences of not paying taxes. Explain that not paying taxes can result in penalties and legal consequences. This can help kids understand the importance of fulfilling their tax obligations.
3. Encourage kids to save for taxes. If your child has a part-time job, encourage them to set aside a portion of their earnings for taxes. This can help them avoid unexpected tax bills and teach them about budgeting and financial planning.
4. Discuss tax deductions and credits. Depending on your child’s age, you can explain how tax deductions and credits work. For example, you could discuss how charitable donations can be deducted from taxable income or how the child tax credit can reduce the tax owed.

Teaching your children about taxes and having them prepare their own tax returns can be an excellent step towards assisting them to become financially responsible and gaining knowledge to make good decisions about their future that will benefit them for life.

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