August 21, 2014

Actor and comedian Bill Murray joked that “the best way to teach your kids about taxes is by eating 30 percent of their ice cream.” While the line is funny, actually removing a third of the ice cream from your child’s dish is not the best way to educate your children about how taxes work. In fact, you’ll probably just upset them.

You can help your kids understand how the tax system operates through simple explanations, shared activities – and by imposing your own “income” tax system at home.

1. Use Receipts to Explain Sales and Property Tax

Help your kids understand that taxes make it possible for your town to have a library, or that money from taxes pays for fire trucks. For instance, if you have small children, save the receipt the next time you buy them a treat. Show your kids the receipt and point out the price of the treat along with the smaller number. Explain that the smaller number represents sales tax, and that that money allows states, counties and cities to pay for important things like schools and playgrounds.

2. Charge Your Kids “Income” Tax on Their Allowance

Explain the concept of collecting money for a fixed period of time, and then spending that money on something specific. No, you don’t have to force your kids to help you complete your income tax return or drag them along to your accountant’s office. Instead, use examples that relate to their lives.

For example, does your teen want to do something expensive, like share a limo with friends on prom night? Collect a small amount of “taxes” – say, 10 percent – from your child’s allowance for from money he earns doing chores. When the time comes for your child to pay for his share of the limo, return the money you have collected as a tax “refund.” Remind him that the windfall is actually his own money, not a gift.

With a younger child, come up with a goal to work towards together, like a surprise gift for Mom or Dad. As they earn money through chores, put their earnings in a clear jar with the tax in a separate jar right next to it. Say, for every dollar earned, 10 cents goes to the tax jar. Once the earnings jar reaches the target amount and it’s time to go shopping, let her spend the tax money on herself. Again, make sure she knows it’s always been her money.

3. Collect Taxes as Punishment, Then Reap the Rewards Together

A tax jar can accomplish dual purposes by helping kids of all ages understand how taxes work and as a form of discipline. Establish a set amount of “taxes” children must pay for failing to clean their rooms or swearing.

Put the money collected in a clear location so that your kids know that you’re not just taking their money away and spending it on yourself. Every few months, use the money collected in the tax jar for a family activity, such as a special dinner. Point out to kids that different governments collect taxes to improve everyone’s lives.

Teach Kids Now, so They Aren’t Surprised Later

Many young people have their first encounter with taxes when they receive their first paychecks from their first “real” jobs. They may be disappointed or even angry about the money that is missing from their paychecks. The activities above can prepare your kids for the reality of payroll taxes and help them avoid that particular form of sticker shock.