Paying taxes is something your kids will have to deal with as adults. So why should you wait until your child’s first job to teach them about the basics of earning money and taxation?
You shouldn’t. You don’t have to either. Teach your kids by charging them the “Parent Tax.”
The Parent Tax is a simple concept: Children pay a flat-percentage tax to their parents on any money that comes into their possession. The percentage is up to the parents, and the tax can be levied on birthday money, allowances, and any other source of income.
Some people will be up in arms over the suggestion that they should tax their children, but the Parent Tax is a tool that parents can use to educate their kids about personal finance issues. According to a survey of high school seniors performed by Capital One:
“Eighty-seven percent of students report that their parents are their primary resource for information about money management and personal finance issues, but only 22% of high school seniors polled report that they talk to their parents about money management ‘frequently.'”
Here are three key reasons for the Parent Tax:
It Prepares Kids For Their First Real Paycheck
My parents didn’t impose the Parent Tax on me, so I was blindsided when I received my first paycheck and saw all of the withheld state, federal, social security and medicare taxes! I was severely disappointed. Children who pay the Parent Tax, however, are aware that taxes are a part of life and don’t expect to receive every dollar they earn in their paychecks. You can even use the tax to help your kids understand why they pay taxes.
It Helps Kids Feel Like They’re Contributing
Raising kids isn’t cheap and most kids have no clue how much money it costs to raise them. The Parent Tax helps kids understand that housing, food, and clothing isn’t free. Kids will take pride in knowing that they’re contributing to the family. By keeping track of how much revenue Parent Taxes generate for your family, you can show your children what that money pays for. For example, if the Parent Tax raises $100 a month, you can show your kids that $100 a month could pay for a week’s worth of groceries, or one month of electricity, or part of the cable TV bill. The tax could even be used to pay for a family trip to Disney World.
Your kids may not agree with what their taxes are paying for. They may think that they shouldn’t have to pay for the broccoli they don’t eat — but this is a great opportunity to teach your kids that adults don’t always agree with everything that their taxes pay for either!
It Acts as a Forced Savings Account
Of course, I’m not actually suggesting that you spend the money that the Parent Tax generates. Instead, use that revenue for your child’s future. Invest it in a college fund — just don’t tell your kids until they head off to college. Then surprise them with the resulting investment account statement. They’ll take pride in knowing that they were the source of this money. Hopefully, as a result of the money discussions the Parent Tax initiated when your kids were younger, they won’t end up blowing the money on partying.
And if your child doesn’t go to college, then he can use those Parent Tax funds to cover the security deposit and rent on a first apartment, or to buy affordable furniture.
Don’t Be The Parent That Doesn’t Talk About Money
Please, don’t be the parent that doesn’t talk to their children about money. Institute the Parent Tax today. Start those money conversations!
How much would you be willing to tax your children?
About the Author
Lance Cothern is a Virginia licensed Certified Public Accountant (CPA). He runs his own personal finance blog, Money Life and More, that covers financial topics such as teaching kids how to write checks and how to earn extra money on the side by taking advantage of credit card rewards.
Photo Credit: familytreasures
Nice idea, and I like it. Would you impose the parent tax on your child’s earned income as well, if they have a side job where they receive a W2? At that point, for the purposes of education, they’re learning it since it’s getting all the normal taxes.
Joel,
I think it depends on the situation. If your parent tax was 25% and your child ends up getting their W-2 income taxed at 15% (for social security and a tiny bit of federal and or state taxes) you could continue taxing at 10% and call the other taxes paid as a tax credit.
I would probably stop the parent tax on W-2 income though, assuming my child was still contributing around the house. Other income, such as gifts, could still pay the tax.
It’s an interesting concept and I may try this out! I’m thinking 25% to start out. That’s high enough to build savings at a pretty quick rate without having the kids feel like they are being robbed blind.
It is also a realistic number for what real life taxes could end up being.
@Charlene: I have to say, I considered doing this several years ago as a means to force my kids to save for the long-term (more for my son’s sake; my daughter has always been a diligent saver), but I never got around to implementing it. In the end, I just couldn’t bring myself to do it.
@Lance: Thanks again for the thought-provoking post. Well done, sir!
Hi Lance,
I love this idea! I might call it the Life Tax rather than the Parent Tax so it doesn’t shine a negative light on the parents, but the idea is still the same. I also wouldn’t use it to fund family expenses, but I did like the teaching opportunity to point out that the Taxee doesn’t necessarily get to drive what the Taxer does with the money.
Great post and call to action…we need more families talking about money and how to manage it!
Ree
I wouldn’t use it to actually fund expenses, I’d definitely save it for my child’s future, personally. No matter what you call it, I think it is indeed a great tool. The only reason I called it the parent tax was because it is paid to the parent, much like federal taxes are paid to the federal government.
I have to save I disagree strongly. All 3 points are bogus but I’ll comment on point 2.
It Helps Kids Feel Like They’re Contributing
Aside from being progressive claptrap, taxing contributes to the government killing more innocent people in the world than any other organization, among many other terrible things it does. Have you ever looked at where your taxes go, and what % actually goes to the “good” things people think governmnet does? I will teach my children to contribute in far more effective ways, like actually helping around the house (my time is more precious than money).
I also have to say for personal finance blog, teaching kids to accept taxation as a way of life, is wrong. The government (through unfunded etitlements and the ability to change tax laws regarding retirement accounts) is the single biggest threat to future well being. Obama has already floated the changing 401k rules, I wonder how many readers would be OK with that? Don’t you like to contribute?
wow. you’re insane.
I wouldn’t say insane, just has different view points. That’s the great thing about the internet!
really what was wrong? what organization killed more innocent people than US government last year? or the year before? or the year before that? What does 90% of federal spending go to? I’ll give a hint 6 programs/interest? Taxes are not contributing to well being, only ignorant people believe that.
That’s the great thing about money, every can go about it in their own way. I hope that you find some way to teach your child about taxation.
I think, developmentally, this would work only after the age of 8 or 9. Before then, just take the “tax” out and explain the idea of taxes to the kids later when they are learning about savings accounts.
I love the idea though.
Thanks Michelle. I do think it would be harder to explain early on, but many Americans don’t understand how taxes work and they’re grown adults! I agree to still take the tax out then just explain it later once they are capable of grasping the concepts.
Lance,
That’s a great idea! We did something slightly different. All the money our children received as gifts was put into a savings account and when they were young teens, we bought Exxon/Mobil and Pfizer stock through the companies direct stock purchase plan…it was a great introduction to saving AND investing!
That works too! I’d probably not take all of it though, kids should be kids with at least some of their money!
I think the concept is easier in theory than practice. Kids are different also, with strengths and weaknesses. Probably like most things best to change the lesson depending on the child. Our kids are 5 and 8 and they earn stickers which have monetary value for behaviors I want to encourage (piano, chores, eating fruits/veggies) and they have to ‘pay’ a portion of the wants while mom and dad pays for the needs. It’s made them very thrifty and my parenting job a bit easier. I think talking to kids about finances work. I do not think you have to be so regimented to teach good financial behaviors. But I guess all of us won’t know until our children are nearing their own retirement. Best of luck with all your kids.
I’m glad you are teaching your kids about money. That is really the key here. Whether you charge a parent tax or not, kids need better financial educations than most are getting these days.
Interesting concept. I consider teaching children about money and investing to be like voting in Chicago – something you do early and often… So hopefully we’ll be having all sorts of conversations as well as practical lessons about managing money.
That said, not sure I’d be willing to take money given to my children, seems too much like stealing, despite the higher intent.
We budget by buckets, so instead I think I’ll teach them by putting all the money they receive into different buckets and showing them what they can use each bucket for (needs, wants, investments, etc.)