It’s time for a young person’s guide to taxes
“Ugh! My W-2 is pathetic.” Sound familiar? Perhaps the moaning and groaning is coming from your teenager, who’s shocked that all the long hours behind the fast-food counter resulted in a smaller-than-expected final take home pay for the year.
Nothing like tax filing season to put the impact of Uncle Sam into perspective.
We’re in the thick of tax season, and while you’re grinding away at getting your W-2s, 1099s and folders full of medical receipts organized, it’s also an opportune time to teach your kids some lessons about taxes.
It’s probably unrealistic to expect a 16-year-old or even a middleschooler to understand all the complexities behind this annual ritual. But there are financial lessons well within the grasp of a school-age child in elementary school on up.
The key is to make the teaching opportunities relatable and peg them to the maturity level of your child. Start by explaining why we pay taxes. Point out that parks, playgrounds, soccer fields, major league baseball stadiums, roads, schools and much more receive tax dollars to pay for services.
There’s no need to get overly technical or to even wrap in political arguments for or against taxes, unless your child starts asking higher-concept questions. Just help your child understand where the money goes.
If you have younger children, for example, the grocery store checkout line can be an eye-opener. Point out that the difference between the labeled price of all the products in your cart is lower than the final tab. That’s thanks to taxes, which go to the government.
If you have children in middle or high school, they may be ready for a deeper dive. Older kids should be at least familiar with different types of taxes — everything from income taxes, property taxes on a home or car to Social Security and Medicare. Point out that we also pay taxes to federal, state, and local governments, again tying in the purpose of each.
If you have a teen holding down a job, explain why the paycheck is smaller than expected. Go over your youngster’s pay stub and explain the difference between “gross income” and “net income,” and this little thing called FICA. Consider pulling out your pay stub and talking through it line by line.
A few years ago I had a memorable conversation with one of my kids who had just graduated from college, landed his first full-time job and was feeling cash rich. But the first paycheck he received was far less than what he expected because he hadn’t accounted for the impact of taxes on his take-home pay. Thud.
I also remember as a teen watching my father sitting at the dining room table with papers and tax forms stacked neatly while he crunched numbers with his calculator. I was totally intimidated by the prospect of someday in adulthood having to file taxes myself.
Which brings me to my final lesson: How do you prepare to file taxes?
Once your child lands that first job, help them plan for filing taxes by keeping their W-2 forms and other documents organized. Encourage them to keep a file for medical receipts, donations to charities and other necessary documents. Being organized may make filing season less daunting.