How to Teach Your Kids About the Tax Facts of Life
You may have a scowl on your face right about now and want to shout, “You want me to teach my kids about taxes when I’m drinking out of a fire hose right now trying to get my own taxes finished? Give me a break.”
OK, wait until April 16 to start the lessons. Because, if you don’t teach them about taxes, they may grow up to resent paying them.
You may feel that your taxes are too high (or too low), but you know the saying: “The only things in life you can count on are death and taxes.” The kids might as well learn the tax facts of life sooner rather than later.
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Seriously, it is important to teach even young kids about taxes. This will help them to avoid what I call paycheck shock — that’s when they receive their first paycheck and see the difference between gross income and net income. It also helps them to avoid asking, “Who is FICO, and why is he taking money out of my paycheck?”
Earning money for chores — and paying taxes
I’m a proponent of teaching young kids the natural consequences of money. That means that the only way you get money is to earn it — there is no entitlement program in life.
I recommend setting up a system whereby kids earn money for chores around the house and then learn to budget that money by dividing it into different jars or accounts as follows:
- Quick cash (or instant gratification): 30%
- Midterm saving (this teaches kids to set a shorter-term goal to save for): 30%
- Long-term saving and investing: 30%
- Charity: 10%
By the time they are 10, they are ready to learn about taxes, which come off the top of their hard-earned allowance, their work-for-pay system.
You might play a game with kids I call Who Pays for That. For instance, when you are in the car, call out something they see and teach them who pays for that.
For instance, if you see a McDonald’s, tell them that it is a private company owned by lots of people called shareholders. When you buy burgers, you are paying McDonald’s for them.
If you see a public library, explain that the town pays for that through taxes, which are something people pay out of their paychecks.
You could explain how a town, city and country have to collect taxes to pay for lots of things we all use, such as roads, hospitals, fire and police people, schools, etc. You get the picture.
You might demonstrate further by letting kids know they’re in a 15% tax bracket. Get them to count out the money each week to put into the Family Tax Jar, where all the kids pay their taxes.
The family can vote on how to use that money to benefit the whole family. It could pay for a pizza or ice cream night.
My kids wanted to save for a trip to Disney. I had them estimate the total cost for the trip, and they figured out they would be in their 40s before their meager tax money could cover that.
Does your child need to file a tax return?
In the middle of doing your own taxes and thinking about teaching your kids about taxes, you may be hit with another thought: “My kid had a summer job and also babysits. Do they have to file a tax return?”
I am not a tax professional, so you need to consult one before you and/or your child consider this situation, but I’m here to offer some basics.
As with all IRS questions, the answer to the question of whether your child needs to file a tax return is, “It depends.” It depends on your child’s income, the type of income they received and their tax situation.
Your child has to file a tax return if they earned more than $14,600 in 2024. So, if they worked and earned less than that, they don’t have to file unless taxes were withheld from their paychecks. In that case, they could get a refund. (This is the standard for any single taxpayer in 2024.)
If your child has unearned income from investments, dividends or interest, that is more than $1,300, they may need to file a return and pay taxes. Also, if your child’s unearned income exceeds unearned income exceeds $2,600, that may be taxed at your rate under the kiddie tax rules.
Parents can sometimes include a child’s unearned income on their own Form 8814 if that’s their only income and totals less than totals less than $13,000, which will obviate the need for your child to file separately.
If your child earns $400 or more from self-employment, they must file a tax return and may even have to pay self-employment tax, which includes the taxes for Social Security and Medicare. This includes income that was paid in cash.
Let’s face it, though. Small babysitting fees probably won’t be reported, but in good conscience, I must disclose that babysitters are still legally required to report their income above $400. If the payer for the service issues a Form 1099 for independent work, this unreported cash income can lead to penalties.
Your kids and gift taxes
If your child receives money as a gift, they do not have to pay taxes on that money. The gift tax generally pertains to the giver, not the receiver.
In 2024, any person could give up to $18,000 to anyone, including a child, without triggering any gift tax reporting. In 2025, that limit is $19,000.
If you gave more than $18,000 to your child (or anyone) last year, you must file a gift tax return (Form 709), but the recipient neither has to file nor pay taxes on the money received.
However, if that money is invested and earns interest or dividends, those earnings may be taxable under the kiddie tax rules.
Most people don’t have to pay gift taxes because there is a lifetime gift tax exemption of $13.6 million for 2024 ($13.99 million for 2025).
What to know about 529 plans:
- If you set up a 529 college savings plan account, or another tuition savings plan, that contribution does not count toward the gift limit.
- You can contribute up to $19,000 per child per year to a 529 account without triggering a gift tax filing.
- There is also a five-year superfunding option in which you can contribute up to $95,000 in one year, as of 2025, as a lump sum but spread it out over five years for tax purposes.
- 529 contributions are not tax-deductible to you — you cannot deduct them from your federal income taxes. Some states allow a state income tax deduction for contributions.
- Withdrawals from 529 accounts are tax-free if they are for qualified educational expenses. That means your kids do not pay either federal or state taxes.
- If the money is used for non-educational purposes, the earnings — not the contributions — will be subject to income tax and a 10% penalty.
Other tax issues to be aware of:
- If you set up custodial accounts (UGMAs or UTMAs), your child will be responsible for paying the taxes on earnings that accrue after they take control of the account.
- If you place money in a trust, there may be additional tax rules on that, depending on how the trust is structured.
Phew!
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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