College Tax Benefits for Colorado Residents

Rules for Claiming the Colorado Section 529 Tax Deduction

Overview of Colorado Education Tax Benefits:

The State of Colorado is one of just five states that allow an “unlimited” deduction for contributions to its Section 529 accounts. This is in contrast to other states that put a dollar limit ($2,500 per year, etc.) on the amount of contributions that can be deducted on residents' state income tax return.

In truth, no state actually offers a truly unlimited deduction because all Section 529 accounts have limits on what can actually be contributed to the plan itself. In Colorado, the maximum contribution that can be made in a beneficiary’s (child’s) name is $280,000.

Of this amount, the entire $280,000 could be deducted in one year if you had at least $280,000 in income, as shown on your Federal Tax Return. This is opposed to other states that might only let you deduct a couple thousand dollars per year, even if the plan’s contribution limit is $300,000 or more.

As with most states, distributions from the Colorado Section 529 plan that are used for qualified education expenses are not subject to taxation. Non-qualified distributions will be subject to tax and a possible “recapture” of the deduction you previously received.

Value of the Colorado Section 529 Tax Deduction:

If you are a Colorado resident trying to choose between a Section 529 plan and other savings vehicles, you need to account for the potential tax savings of using the state's plan. Remember, Colorado residents only receive a deduction for contributing to Colorado’s CollegeInvest or Prepaid Tuition programs, not other states' plans.

Considering that the top income tax bracket for Colorado residents is 4.63%, every $1,000 contributed to a Colorado Section 529 plan could save a maximum of $43 at tax time. In other words, receiving the deduction could be similar to a 4.63% bonus on the amount contributed. For many taxpayers, this may not offset the benefits of other accounts such as a Coverdell Education Savings Account (ESA).

Not a Tax Deduction, But an Amazing Benefit:

The Colorado Matching Grant Program matches contributions made by Colorado residents to the state’s Section 529 plans. To be eligible, your household income must be below $64,614 (adjusted annually), and you must submit a separate application.

Claiming the Deduction:

Contributions by residents to a Colorado Section 529 plan are deducted on Line 10 of the Colorado Individual Income Tax Return (Form 104).

Reference and Documentation:

Additional documentation for this deduction is available from both the Colorado Department of Revenue and the CollegeInvest Section 529 Plan websites.