How to explain US taxes to kids

How to explain US taxes to kids

Taxes are confusing enough for a lot of adults, so you can only imagine how bewildering this subject might be for kids and teens. However, it is something that everyone will need to know by the time they start working and start paying taxes.  In this blog post, we'll look at topics such as what taxes are, how they are paid, and why we have taxes.

What are taxes?

Simply put, tax is money paid to the government by individuals and businesses that is used to fund public services like schools, police and firefighters, among others. 

 

Some of the most common types of tax are payroll tax, sales tax, property tax, estate tax, and gift tax, which we'll look at later in the article.

 

Some taxes come out of your income, while some are paid when you buy items or pay for services. Depending on how old your child is, you might want to explain tax percentages. It's a common point of confusion that reaching higher tax bands can leave people with a lower income, so this is not an easy concept to explain to kids. Start with the basics and explain that while the government takes tax money away, it always pays to work hard and earn more money. It can be easier to teach your kids with various money apps. 

 

When your kids understand the basics of taxes, you can also tell them about all the different taxes that people pay.

Different types of tax

It's worth telling your kids that there are different types of taxes they will have to pay. The main types of taxes in the US to teach your children about are:

  • Income tax: Income taxes are the most common type of tax, and they are levied on your earnings from work, investments, and other sources. Income taxes are progressive, which means that the more you earn, the higher your tax rate will be. The federal income tax is made up of brackets ranging from 10% to 37%. 
  • Payroll tax: These taxes are used to fund social security and Medicare, and they are generally deducted from your paycheck before you receive it. Payroll taxes are divided into two categories: Social Security taxes and Medicare taxes. Social Security taxes contribute to the Social Security trust fund, while Medicare taxes contribute to the Medicare trust fund. Payroll taxes can be a significant expense, but they help to fund important programs that provide benefits to millions of Americans.
  • Sales tax: This is a tax that is added to the price of goods and services that are purchased. The amount of tax charged varies from state to state, but the general rate is between 4% and 7%. Some states also charge local sales taxes, which can range from 1% to 3%. When you make a purchase, the price you see usually includes the sales tax. For example, if you see a sign that says "Price: $10 + $0.80 sales tax," the total cost of the item would be $10.80. The seller is responsible for collecting the sales tax from the customer and remitting it to the government. So, when kids use their allowance to pay for purchases, they are indirectly paying taxes via the sales tax that is included in the price of the goods or services. This means that your children are helping to pay for important facilities and services provided to others simply by spending their hard-earned dollars.
  • Property tax: This is a tax that is paid on the property, such as your home or land, and the amount that needs to be paid depends on the value of the property. Property taxes are typically imposed by state and local governments, and the money is used to fund public services such as schools, roads, and police departments. Property taxes are generally paid by the owner of the property, but they can also be paid by the tenant or lessee. In some cases, the amount of property tax that is owed can be reduced if the property is used for certain purposes, such as farmland or low-income housing.
  • Estate tax: The estate tax is a tax imposed on the transfer of property after someone dies, and the amount is based on the value of the estate. This tax is imposed on the estate, not on the heirs, and is payable by the executor of the estate. The current estate tax rate is 40%, which means that for every $1 million in value, the estate will owe $400,000 in taxes. The estate tax doesn't affect everyone (as married couples can pass on an unlimited amount of money to each other without paying any taxes), but it is an important source of revenue for the government.
  • Gift tax: The gift tax is a tax imposed on the transfer of property from one person to another while the donor is alive. The amount of the tax is based on the value of the gift, and it is typically paid by the donor. Gift tax has an annual exclusion ($15,000 in 2021 and $16,000 in 2022), which means you can give $15,000 to as many people as you want in a year without having to pay any gift tax. Gifts between a married couple where both parties are US citizens are not subject to gift or estate tax.
  • Sin Tax: A sin tax is a tax imposed on products or activities that are considered to be harmful to society, such as tobacco, alcohol, and gambling. The purpose of sin taxes is to discourage people from engaging in these activities, and the revenue generated can be used to fund programs that help offset the negative effects of these activities.
  • Travel Tax: Travel tax such as lodging tax and tax on car rentals. Depending on the state, the tax can be a flat fee or a percentage of the cost. The tax is generally imposed by state and local governments, and the money is used to fund public services such as tourism promotion and infrastructure improvements. 
  • Capital Gains Tax:  A capital gains tax is a tax imposed on the sale of an asset, such as a stock or a piece of real estate, that has appreciated in value. The amount of tax owed is based on the difference between the purchase price and the sales price. For example, if you bought a stock for $100 and sold it for $200, you would owe capital gains tax on the $100 profit. Capital gains taxes are typically imposed by federal and state governments, and the rates can vary depending on the type of asset and the holding period. 
  • Value-Added Tax:  A value-added tax (VAT) is a type of consumption tax that is imposed on the sale of goods and services. The amount of tax owed is based on the value added at each stage of production. This cost is often passed onto the consumer in the form of higher prices. 

When is tax paid?

Most taxes are paid on an annual basis, but there are some taxes that are paid more frequently. For example, payroll taxes are deducted from your paycheck on a bi-weekly or monthly basis. Similarly, property taxes are typically paid once a year, but they can also be paid on a quarterly or monthly basis.

 

Some taxes, such as estate tax, are only paid when certain events occur, such as the death of a person. In some cases, taxes can be deferred until a later date. For example, capital gains taxes on investments can be deferred until the investment is sold.

 

In general, taxes are due on April 15th of each year, but there are some exceptions. For example, if you are self-employed, your taxes are due on June 15th. If you file an extension, your taxes are due on October 15th.

 

It's important to note that even if you don't owe any taxes, you still need to file a tax return. If you don't file a return, you may be subject to penalties and interest charges.

Why do employees pay taxes?

Employees pay taxes because it is their legal obligation to do so. The money that they pay in taxes goes towards funding vital public services like roads, schools, and the police. Although paying taxes may seem like a burden, it actually has important social impacts that benefit everyone in society. In fact, paying taxes is one of the most important things that we as citizens can do to support our country, as well as live in a fair and safe society.

What is a pay stub and what does it consist of?

A payslip, or pay stub, is a document that shows how much an employee has earned and how much tax has been deducted from their wages. These are the main elements of a payslip:

  • Gross pay: This is the amount of money you have earned before any taxes or deductions have been made.
  • Net pay: This is the amount of money you'll receive after taxes and deductions have been made from your wages.
  • Taxes: This is the amount of money you owe in taxes, including Medicare and social security.
  • Other deductions: Other deductions can include 401(k) contributions, health insurance, and union dues.
  • Paid leave: This is the amount of annual leave, sick leave, or other types of leave that you have earned.
  • Other information: This can include your employer's name and address, as well as your employee ID number.

A pay stub is a good way to keep track of your earnings and how much tax you are paying. It is also useful for budgeting, as it can help you to see how much money you have available to spend after taxes and deductions have been taken into account.

Does everyone pay the same amount of taxes?

The income tax system in the US is progressive, which means that those who earn more money pay taxes at a higher rate than those who earn less. The amount of tax you pay varies, following a system of income brackets and tax rates. With this system, the government collects more money from those who earn more, in order to fund public services and help those who are less well-off.

 

The amount of tax you pay also depends on your personal circumstances, like whether you are married or have children. You may also be eligible for tax relief, which can reduce the amount of tax you owe.

What is the purpose of income tax in the US?

Income tax is a tax that is paid on your earnings from employment, being self-employed, investments, and other sources. The money that is raised from income tax pays for essential public services in the US, including:

  • Major health programs: This includes Medicare, which provides healthcare for the elderly, and Medicaid, which provides healthcare for people in need. 
  • Social security: This is a government program that provides financial assistance to retired people and those with disabilities.
  • Defense and security: This includes the cost of maintaining the military, as well as activities like homeland security.
  • Public services: This includes things like road maintenance, garbage collection, and running schools. 
  • Interest on debt: This is the money that the government has to pay in interest on money that it has borrowed to fund its operations.
  • International aid: This is the money that the US gives to other countries in need. For example, after a natural disaster.

Income tax is collected to pay for a wide range of services that we use in everyday life, such as hospitals and roads. They are also used for social support by paying for benefits, facilities, and housing for people in need, including the disabled.

What is the purpose of corporate tax in the US?

Corporate tax is a tax that is paid on the profits of businesses and organizations. The money raised from corporate tax makes a significant contribution to funding essential public services.

 

In the United States, corporate tax is imposed at the federal level, as well as by some state governments. The federal government uses corporate tax to fund a variety of programs and services, including defense, education, and health care. State governments use corporate tax to fund services such as education and transportation.

 

The flat rate of corporate tax is 21 percent. This provides a critical source of revenue for the US government. That's why it's important to ensure that businesses and organizations pay their fair share of tax in order to fund vital public services.

When is the tax year in the US?

The tax year is a way of measuring how much someone has earned, and thus how much tax they need to pay. All your kids will need to know is that the tax year goes from January 1st to December 31st - the same as the calendar year. The tax year is used by the Internal Revenue Service (IRS) to calculate how much tax an individual owes.

Tips on how to help explain taxes to kids

Here are some potential approaches that you could use to introduce the topic of taxes to your children.

  • Use everyday examples: You could explain taxes by using examples from daily life, like how the government adds taxes to items at the grocery store.
  • Use props or visual aids: You could use familiar items to help explain taxes, like a piggy bank with money in it to represent the government collecting taxes.
  • Practice Paying Taxes: Introduce them to the concept of taxes by taking a small percentage out of their allowance and setting out what that money will go towards such as household items.
  • Go through your payslip: Show your kids a monthly payslip and walk them through the different breakdowns.
  • Be honest: It's important to be truthful with children when explaining taxes. Explain taxes, what they are, and their role in society, in a simple and straightforward way.
  • Use age-appropriate language: It's vital to use language that your teen will understand. Avoid using technical jargon or terms that they won't be familiar with.
  • Key services: Stress the importance of taxes in providing vital infrastructures we all use, like transport and schools.
  • Taxes for all: Emphasize that everyone has to pay taxes, regardless of their income or social status. You could also expand on this by explaining how different tax rates apply to people with different incomes, and how personal circumstances can affect the amount of tax you pay.

Boost your children’s financial education with GoHenry’s in-app Money Missions

Learning about taxes is an important part of financial education. If you're looking for more ways to improve your child's financial knowledge, our in-app Money Missions can help. These fun bite-sized lessons are targeted to your child's age and knowledge level. There are quizzes on jobs & earning, budgeting & plans, modern money, and more.

 

Learn more about GoHenry prepaid debit card today.

 

 

 

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Written by Kristin Yarbrough Published Dec 2, 2022 ● 3 min. read