The How’s and Why’s of Taxing Your Child’s Allowance Money
The How’s and Why’s of Taxing Your Child’s Allowance Money
Trent Hamm Founder of The Simple Dollar Last Updated: December 15, 2020
A few years ago, when I was using TurboTax to prepare our family’s income tax return, my youngest child hopped up on my lap. He had the insatiable curiosity that only a five-year-old can possess, and thus he immediately began peppering me with questions. What are you doing? What are income taxes? Why do you have to pay that money?
As I explained to him the basics of income taxes, I realized that the best way to teach the lesson of taxes to him was to run a little experiment on his allowance, along with his older siblings. What could I actually teach them about taxes that would feel like a learning experience and not like punishment?
This is a question many parents ask themselves when teaching their children about money basics. Giving a child an allowance is a pretty standard financial teaching tool, but how do taxes fit into this?
To be clear, this is about “taxing” your child’s allowance, in the sense that you’re choosing to withhold a portion of their allowance for the purposes of teaching your child a practical lesson about taxes. This does not have any actual taxable consequence. Let’s be abundantly clear: there are no federal tax consequences for giving your minor child unearned income in the form of an allowance.
The first question that many parents ask is whether they should give their children an allowance at all. If so, should that allowance be tied to household chores?
A study by Rona Abramovitch, Jonathan Freedman, and Patricia Pliner in the Journal of Economic Psychology sought to answer that question. They concluded that children who received allowances demonstrated a better mastery of pricing knowledge, meaning that they had a much more developed sense of the prices of items and how far their money would go.
What about tying allowances to chores? Joe Pinsker in The Atlantic expressed doubt about this approach. “A range of experts I consulted expressed concern that tying allowance very closely to chores, whatever its apparent short-term effectiveness, can send kids unintentionally counterproductive messages about family, community, and personal responsibility.
In fact, the way chores work in many households worldwide points to another way, in which kids get involved earlier, feel better about their contributions, and don’t need money as an enticement.”
To continue reading, please go to the original article here:
https://www.thesimpledollar.com/financial-wellness/should-you-tax-childs-allowance-money/