A taxpayer can deduct on their Colorado income tax return the payments or contributions made to certain "qualified state tuition programs." [§39-22-104 (4) (i), C.R.S.]. They cannot take this deduction if the payments or contributions were not included in their federal taxable income.
What is a Qualified State Tuition Program?
For purposes of this subtraction, a qualified state tuition program is a "529 College Savings Plan" administered by CollegeInvest and includes the Direct Portfolio College Savings Plan, Scholars Choice College Savings Program, Smart Choice College Savings Plan, and Stable Value Plus College Savings Plan.
Improper Distributions
The principal amount of any money deposited into a qualified state tuition program is generally not taxable when
withdrawn or distributed. However, the withdrawal or distribution will be taxable in the year withdrawn if -
1. the taxpayer previously deducted the payments or contributions on a Colorado income tax return, and
2. the withdrawal is not made for one of the following purposes:
● to pay qualified higher education expenses (as defined in section 529(e)(3) of the Internal Revenue Code),
● as a result of the beneficiary’s death or disability, or
● as a result of receiving a scholarship and as long as the amount of distribution, refunds, or withdrawals made do not exceed the amount of the scholarship provided during such tax year.
The amount of any taxable withdrawal or distribution must be added to taxable income on Form 104 on the "other additions" line in the year the distribution is received.
Similarly, if a taxpayer uses these funds to pay the education expenses of someone other than the designated beneficiary, the funds become taxable in Colorado -- even if the expenses otherwise qualify as higher educational expenses.
For full information on this Subtraction, see this direct link to Colorado FYI 44.