Happy TAX DAY!
Today, in honor of the 15th day of Financial Literacy Month, which falls on tax day, FUTURES: Financially Literate Kids for a Financially Literate Society™ is focused on helping kids understand what taxes are and how they benefit the community. While you might be grumbling about your own debt to Uncle Sam, this is a great opportunity to introduce kids to the ins and outs of income tax.
A lot of kids probably don’t know much about taxes beyond hearing adults joke or complain about them. But that ignores the many important benefits of taxes. First, explain to kids that taxes are fees that a government entity collects from individuals or companies in order to fund public works and services. (Source: https://www.investopedia.com/terms/t/taxes.asp) Some types of taxes are:
income tax - a tax on a person’s earnings
corporate tax – a tax on a company’s profits collected by the government
sales tax - a tax on goods and services
property tax – a tax on the value of land and property
estate tax – a tax on property and assets upon a person’s death
tariff – a tax on imported goods
Explain to kids that if they have probably paid taxes themselves in the form of sales tax if they’ve ever bought candy or a new toy at the store. Tell them that taxes help us pay for many important things, including public schools, roads, bridges, playgrounds, national parks, and other services that benefit everyone in a community. Taxes also pay for the military, police, fire fighters, and other services and agencies that work to protect us. Without taxes, the government could not run.
Prompt a discussion by asking kids: What else can you think of that is paid for by taxes?
Six Tax Facts!
Share a few of these quick tax facts during class or at the dinner table and you’ll come across as quite knowledgeable when it comes to taxes.
When someone receives a paycheck, a certain percentage is taken out (or deducted) and given to the government in the form of state and federal taxes. The percentage depending on how much money you earn and where you live.
Some states like Colorado, Illinois, Michigan, and Pennsylvania have a flat income tax. With a flat income tax, everyone pays the same percent of their income.
Other states have a progressive tax. From A to Z, Alabama and California to West Virginia and Wisconsin, most states have a progressive income tax. With a progressive income tax, the percentage people pay depends on how much money they make.
The United States federal income taxes are another example of progressive taxes, based on income.
State income taxes are determined at a state level. Did you know that seven states have no state income tax? That’s right: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have no state income tax.
Sales tax is a tax that states charge on certain items and this varies from state to state. For example, there is no tax on clothing in Pennsylvania. Several states—Alaska, Delaware, Montana, New Hampshire, and Oregon—don’t have state sales taxes (Source: https://www.investopedia.com/terms/t/taxes.asp) at all. Each state determines the amount of its sales tax and decides what items are taxed and what items are not taxed. Most often, items considered to be luxury items are the first to be taxed.
Getting Kids “on Board!”
Board games are a great way for kids to “experience” life events like taxes, with only minimal consequences. In the board game Monopoly, for example, a player who lands on the Income Tax square has to cough up $200 or 10% of whatever she’s accumulated in the game so far. The player has to make her decision before adding up her assets, so it pays—literally—to have a good idea of how much you have before landing on that square.
Life isn’t exactly a game of Monopoly, but it’s a good idea to keep a very close eye on what you make and spend in the real world as well. If you have the board game on hand at home or at school, it’s a great opportunity to break it out for a game—and some very teachable moments. Speaking of life, another great game is called The Game of LIFE. Both games are available on Amazon and can likely be found at a local community center or library. These games will help kids grasp the real-world nature of taxes and life’s financial surprises.
Tax Your Kids?!
One of the clearest ways to drive home the point and benefit of taxes and to demonstrate the positive effect taxes are designed to provide is by setting aside a small percentage of your kids’ stash—of some prized possession or collection—for the “greater good.” This model works equally well in a classroom setting, for the greater good of the entire class. Students can contribute some of their individually-earned points or pompoms in a class Bravo Jar to collectively garner a whole-class field trip, for example.
Income
Tax Percentage
With younger children, you might choose to collect a “family fun tax” of a portion of their candy stash to show them how taxes can work. Or, with older children who earn their own money through a babysitting job or allowance, you can set aside a certain percentage for a week or more to go toward household upkeep or to pop for that movie rental everyone’s been talking about. Everyone in the family should contribute to the collection. Explore the differences and percentages. No matter how you choose to do this, be sure your kids are in an appropriately scaled and easily attainable “tax bracket” that aligns to the example.
If this process works well, kick it up a notch and inspire older kids to set aside a smaller percentage of their earnings for a set period of time as a tax-planning reserve to help them to understand how many adults plan, save, and budget for taxes all during the year.
Whether you keep the “taxes” you collect or give it right back to your kids in the form of cash, candy, pizza, or a movie, this process really helps kids understand how—and why—taxes are designed to work.
For more information about FUTURES: Financially Literate Kids for a Financially Literate Society™ for students in kindergarten through eighth grade or to download any of the 29 sections of the program, please click below.