I love Halloween. I love all of the camp and the craziness. I always have. I bake gross looking treats. I play Halloween music. I buy candy. I decorate almost every room in the house (our family finds fake spider webs throughout the year like most people find pine needles weeks after Christmas). I buy into the whole Halloween spectacle.
But here’s what I don’t do: I don’t collect a “candy tax.”
The candy tax is a parenting trend where you purport to teach your kids about responsibility by stealing some of their candy levying a “tax” on their trick or treat loot. The tax can be as much as one-third of the candy “earned” on Halloween. The tax, which is levied in jest, is meant to teach a lesson about how government works. Only it’s not remotely comparable to the real thing. There are a few key concepts in the levying of the candy tax that don’t translate into the real world:
1. The United States doesn’t have a flat tax. That 33% candy tax? That’s a flat tax.
Why does it matter? A surprising number of taxpayers don’t actually know how much they pay in tax. We often fall into the trap of assuming that we pay a flat percentage because we match up with a tax bracket on a chart. But here’s why that’s not a fair reflection of the tax you pay: our income tax system is progressive. That means that all taxpayers with the same tax filing status pay the same amount of tax on the same amount of taxable income.
If you’re a married taxpayer, you pay the same rate on the first $18,550 of taxable income as I do. And I pay the same rate as Warren Buffett. And Buffett pays the same rate as Jennifer Lawrence. And we all pay the same rate on the next $57,000 or so. The rate increases as income increases but the higher tax rates are only applicable to the income above the thresholds. In other words, if you’re filing jointly and you have taxable income of $50,000, you pay 10% on the first $18,550 plus 15% of the amount over $18,450:
$18,550 x 10% = $1,855 AND ($50,000 – $18,550) x 15% = $4,717.50
$1,855 + $4,715.50 = $6,572.50 TOTAL TAX
You might consider yourself to be in a 15% bracket but your actual tax rate is 13.145% ($6,572.50 tax on $50,000).
The same kinds of calculations apply as you run up the brackets and the numbers get more dramatic as the rates increase.
2. For the most part, income is income. All candy, however, is not the same.
Why does it matter? With a few exceptions (long-term capital gains and qualified dividends, for example), baskets of income for federal purposes are treated equally. Dollars from wages are taxed at the same rate as dollars from tips. Dollars from interest and dividends are taxed at the same rate as net rental income and gambling winnings. We don’t value one more than the other.
When you grab a flat 33% of your kid’s candy haul, you’re not taking into account the actual value of the candy and let’s face it: there is a hierarchy. The king-sized Snickers is not worth the same as a Now & Later. That’s like treating one share of Apple stock as if it’s worth the same as one share of Theranos stock. When you snatch a third of the candy bag without regard for what’s in it, you’re implying that all of the candy in the bag is valued the same. If, however, you decided to pick and choose what you want from the bag, grabbing the M&Ms and leaving the Mary Janes behind, it’s like asking the government to choose how it wants to be paid in kind and nobody wants that.
3. Seizing the candy means your kids aren’t getting the benefit of any deductions (or credits).
Why does it matter? We’ve already established that we don’t have a flat tax. Our tax system allows you to reduce taxable income with deductions and tax due with credits. By taking a fixed share of the kitty, you’re not giving your kids that option. I know: you’re trying to make it as simple as possible. But is it fair? Should the kid who’s wearing a black tee-shirt as a costume end up with the same amount of candy as the kid who made their own robot costume from scratch? Or should the kid who used more resources get a bigger break?
Taxpayers who spend money to make money are generally entitled to deductions. While the ability to take itemized deductions on a Schedule A is limited as a practical matter, taxpayers who are in business for themselves (in this case, our little trick-or-treat entrepreneurs) would be able to reduce taxable income on a Schedule C by deducting expenses. Sole proprietors and the self-employed are entitled to take a deduction before calculating the tax. It’s a good lesson in learning that sometimes you have to spend money (and perhaps a lot of time and hot glue) to make money (I mean candy).
4. Trick or treating isn’t actual work.
Why does it matter? I don’t care how cute your kids are. My kids are as adorable as they come but they don’t “earn” that Halloween candy, notwithstanding my references to self-employment income above. At most, from a tax standpoint, that candy is a gift. Even if it’s not always given out of “love and affection” (for some, it’s coercion either by guilt or fear of being egged), it likely meets the IRS criteria of “[a]ny transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.” Realistically, there’s not even a hint of consideration: most neighbors don’t even ask kids to say “trick or treat” anymore. Some don’t even require a costume and will, in some instances, just leave a big bucket of candy on the porch for the taking.
We talk a big talk about how the feds tax everything but that’s not always true. Gifts are a great example. If I give you something just because I want to, it’s a gift. And for income tax purposes, that doesn’t trigger income tax (gift tax is a whole other issue). It doesn’t matter if it’s a Kit Kat bar or a big fat check or an entire house: it’s not income and it’s not taxable to the recipient for income tax purposes.
5. Timing is everything. Collecting the candy tax immediately teaches the wrong message.
Why does it matter? When you swoop in and take a portion of candy, you’ve taught your kids that tax might be due. Taxpayers get that part – it’s not rocket science. But it doesn’t teach the most valuable lesson of all: timing is everything. The majority of taxpayers who get into tax trouble do so because they didn’t have the government (or an employer) reaching in immediately and withholding a portion. They ran into trouble because they couldn’t figure out how to pay their taxes when the time came to remit payment.
Our “pay as you go” system applies generally to wages (assuming you’re an employee and not self-employed) using withholding. If you adjust your withholding properly, when you file your tax return, the math should work out so that you neither owe too much nor are you owed too much. But as more and more taxpayers rely on other sources of income – most notably, self-employment income – it’s not that simple. Since there’s no withholding, taxpayers are supposed to make estimated tax payments in order to avoid owing too much at the end of the year but more often than not, those payments get skipped, made late or completely ignored. The result is a big liability at tax time.
The reality is that when it comes to withholding, we don’t really miss what we didn’t have in our pockets to begin with. It’s not as painful come tax time when the feds already have your tax dollars on deposit. But writing that check? That hurts. If you really wanted to teach your kids a lesson, you’d ask them to pay up the week or so after Halloween (of course, then you’d be relegating to collecting boxes of melted Whoppers or imposing liens on future Christmas candies).
The bottom line is that I don’t think a “Halloween tax” teaches your kids anything. If I want the candy, I’m taking the candy. It’s not a tax. I simply want the candy.
And I’m not judging you (okay, maybe just a little) if you have a candy tax at your house: I love a good Milky Way as much as the next parent. And I get that this could be a great opportunity to talk financial literacy with your older kids. But your younger kids? Admit it. Like me, you just want the candy.
But taxes have enough of a bad reputation already. Don’t make it worse by spooking your kids at Halloween. And the accountants, tax attorneys, CPAs, Enrolled Agents, and the Internal Revenue Service (IRS)? We’re all scary enough without making kids think we’re out to take their candy (except for Reese’s Peanut Butter cups – we totally want those).