Taxes may not be the most exciting topic, but teaching your teens about taxes can empower them to understand how their money is spent and used both personally and at the government level.
Why We Pay Taxes
Taxes provide essential revenue for federal and local governments, funding public services such as:
- Defense (military and national guard)
- Police
- Justice systems
- Public Education
- Roads
- Emergency services like firefighters
- Public libraries and parks
When teens understand why we pay taxes, they can appreciate the vital role taxes play in maintaining the services and infrastructure we rely on daily.
Types of Taxes
The concept of taxes can be complicated and daunting, but breaking it down into the most common types can make it more manageable. Here are the key types of taxes teens should understand:
- Sales Tax: Sales tax is typically a percentage of the purchase price added to the final cost. For example, when you buy a shirt, you don’t just pay the price of the shirt; you also pay the sales tax for the city where you purchased it.
- Federal Income Tax: Federal income tax is a percentage of a person’s income. For employees, the amount is deducted from their paycheck and sent to the federal government by the employer.
- State Income Tax: Similar to federal income tax, but the money is sent to the state government. As of 2024, nine U.S. states do not charge state income tax.
- FICA (Federal Insurance Contributions Act): FICA taxes are for Social Security and Medicare, deducted from both employees and employers. These funds are collected over a person’s working life and are payable upon retirement.
- Property Tax: Property tax is levied on property owners and sometimes included in lease agreements. The rate depends on the county, type of property, and its uses.
Practical Examples to Help Teens Understand Taxes
Understanding taxes can be easier with practical, real-life examples:
- Sales Tax: When you take your child to the store, let them pick out an item between $1 and $5. Give them money to pay for it in cash and show them on the receipt how much was charged for taxes. This hands-on experience helps them see how sales tax works.
- Income and FICA Tax: Show your child your pay stub and explain how much is taken out for taxes. Discuss the different types of taxes and what the government uses the money for. This can help prepare them for when they start paying taxes from their first job or business venture.
Keep the Conversation Going
The key to teaching taxes is simply talking about it. Neither you nor your teen need to be tax experts, but having a basic understanding of why and how we pay taxes will set them up for long-term financial success.
Remember, taxes are complicated and ever-changing, so it’s okay not to know everything. If you have specific tax questions, it’s best to consult a licensed professional.
