Are contributions to a Medicaid Income Pension Trust (type of Miller Trust) excluded from taxable income?

[PatriciaV]

No, the income deposited into a Medicaid Income Pension (Miller) Trust may be taxable to the beneficiary, depending on the individual's total taxable income for the year. A Miller Trust shelters excess income in states with a Medicaid income cap. But the income deposited in the trust is still reported on the individual's tax return. There is no deduction for contributing to a Miller Trust.

Further, any income generated by the trust must be reported by the beneficiary, either from a Form 1041 Schedule K-1 or directly on the individual tax return. Since a Miller Trust is used by a low-income taxpayer, the tax is likely to be low.

[1040xwhoops]

Thank you for your insight. Since the contribution is taxable to the taxpayer, what is the offsetting deduction/expense that nets against that income?  If there is no offsetting deduction/expense, the return will show a gain, which does not reflect the actual result for the taxpayer since the income is ultimately given to Medicaid.

[PatriciaV]

The payments to the nursing home or other care facility made out of trust funds would be medical expenses to the beneficiary.

Example:

Social Security payments (income) deposited into the trust by the beneficiary:

>> Contribution recorded by trust; 1099-SA income to beneficiary.

Payments to Medicaid by the trust:

>> Medical expense recorded by trust, passed through to beneficiary (on Sch K-1 if the trust files a separate tax return).