When our eldest asked directly about santa we answered honestly and immediately launched into something like "Lots of children believe for longer than you have, you can't know who believes and who doesn't so don't talk about it. Adults like to make a big deal out of Santa to make Christmas more fun for children, adults fun comes from how magical kids find Christmas (and Santa), you have reached the point where your fun comes from helping making it magical for others."
This is the approach we have taken with Santa and Tooth Fairy. We also use a similar theory when explaining various religious beliefs to my child - we say that there are various people with various religious beliefs and they all choose what the best fit for them is when it comes to religion and spirituality.
We had an awkward moment in Disneyland last Christmas when in the middle of the Christmas parade with throngs of people around, my 5 year old DS yelled to me excitedly: "Look the man in the Santa costume is here and the reindeer are all men in reindeer suits too because they are walking on 2 legs!". And we had a similar moment in the "Meet Mickey" event earlier in the day too. I quickly hushed my son on both occasions but I could see that many people were smiling at what my son said while there were many disapproving frowns too.
