Qualified State Tuition Program

For tax years beginning on or after 2001, you can deduct on your Colorado income tax return the payments or contributions you make to certain "qualified state tuition programs." You cannot take this deduction if the payments or contributions were not included in your federal taxable income.

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The principal amount of any money deposited into a qualified state tuition program is generally not taxable when withdrawn or distributed.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 withdrawal if:

You previously deducted the payments or contributions on a Colorado income tax return, and
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 beneficiarys 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 you use 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.

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