1. Tell the truth.
Tell your children the true story of Christmas. His birth which resulted in His death which secured the salvation of many sinners is indeed the reason for this season. Read the narratives in Matthew 1-2 and Luke 2 with your children. Read them throughout the month of December. Read them on Christmas morning before the gloriously chaotic unwrapping frenzy begins.
If we're going to cry "foul" at the world's ongoing attempt to remove Christ from Christmas, let's make sure we're not guilty as well. Make much of Christ in your home this Christmas.
2. Do Not Lie.
While I would not want to dictate, in areas of liberty, how your family celebrates Christmas; I can say one thing on the authority of God's Word: Do not lie. (Exodus 20:16; Ephesians 4:25) Parents, do not lie to your children about Santa Clause. It's that simple.
Do not tell them that he brings their gifts.
"Every good gift and every perfect gift is from above..."Do not tell them that "he knows when you are sleeping and knows when you're awake."
(James 1:17 ESV)
Do not tell them that "he knows when you've been bad or good."
He doesn't. (Neither does that shelf-elf guy, for that matter.)
"The eyes of the LORD are in every place, keeping watch on the evil and the good.
(Proverbs 15:3 ESV)
O LORD, you have searched me and known me!3. Use discernment.
You know when I sit down and when I rise up; you discern my thoughts from afar.
You search out my path and my lying down and are acquainted with all my ways.
Even before a word is on my tongue, behold, O LORD, you know it altogether.
You hem me in, behind and before, and lay your hand upon me.
Such knowledge is too wonderful for me; it is high; I cannot attain it.
(Psalm 139:1-6 ESV)
Having now said the hard thing, let me help you keep all this in a balanced perspective.
Santa does not have to be a bad word in your home. Tell your children about him - but tell the truth. Tell them the history of the real Nicholas of Myra if you like. Here's one great story about St. Nick's desire for the truth of Christ to be known. Sing the fun & silly songs - you know, deck them halls and all that stuff. But sing the sacred too. And sing them all the more loudly!
It's not necessarily sinful to include some of the whimsical with the worshipful (I'd still be cautious when they're younger), but take great effort to be sure that all things secular are subservient to that which is sacred.
It was a group of wise men who bowed to Christ in His home a couple of years after His birth, making Him central in their worship. Let us be all the more careful to do the same in ours.