Child’s Compensation Taxed

A seven-year-old child received a $30,000 court award for personal injuries. The award will be invested on the child’s behalf. How will it be taxed?

A court’s award of damages as compensation for personal injuries is tax-free when received. However, when the award if invested, the income it produces is taxed under normal rules.

In the case of a child under age 14, investment income exceeding $1,300 may be taxed at the top-bracket rate of the child’s parents. To avoid tax, the award may, of course, be placed in an investment that is tax-exempt (such as municipal bonds) or in one that will defer taxes (such as growth stocks or Series EE saving bonds).