by Tyna Mikulec
The Colorado Department of Revenue has provided guidance on personal income tax subtractions and an employer credit related to qualifying contributions made to ABLE and 529 accounts. (Income Tax Topics: ABLE Contribution Subtraction, Colo. Dept. Rev., 02/01/2023; Income Tax Topics: 529 Contribution Subtraction, Colo. Dept. Rev., 02/01/2023; Income Tax Topics: 529 Employer Contribution Credit, Colo. Dept. Rev., 02/01/2023.)
Personal income tax subtractions.
ABLE account: Qualifying taxpayers can claim a subtraction on their income tax returns for the 2023 through 2025 tax periods for qualifying contributions made to a qualified Achieving a Better Life Experience (ABLE) program administered by Colorado ABLE. Only individuals, estates, and trusts can claim the subtraction.
Rollovers from an out-of-state ABLE program or an out-of-state qualified tuition program plan to a Colorado qualified ABLE program may qualify for the subtraction, subject to the same conditions and requirements of any other contribution. The amount that was originally invested in the other state’s account may qualify while the earnings do not. Rollovers from an in-state qualified tuition program to a Colorado qualified ABLE program do not qualify. The subtraction is also not allowed for any rollovers from a qualified ABLE program within Colorado to another qualified ABLE program within Colorado; and for payments or contributions made to a qualified ABLE program established and maintained by another state. No subtraction is allowed for any payments or contributions that are excluded from the taxpayer’s federal taxable income (FTI) for the taxable year.
The subtraction is limited to $20,700 for single filers and $31,000 for joint filers, per beneficiary, for tax year 2023. If the taxpayer makes contributions to both a qualified state tuition program and a qualified ABLE program for the same beneficiary, the aggregate subtraction is subject to the limitation. The limitation is adjusted annually based on the percentage change in the combined average annual costs of tuition and room and board for all state institutions of higher education.
An account holder must make an addition on their tax return for any distribution, refund, or withdrawal from a qualified ABLE program if used for a purpose other than one of the following qualifying reasons: (1) to pay qualified disability expenses; (2) as a result of a beneficiary’s death or disability; or (3) as a result of a change in the designated beneficiary for the account.
529 account: A personal income tax subtraction is allowed for qualifying contributions made to a qualified state tuition program administered by CollegeInvest, known as a 529 account. The subtraction limitation is $20,000 for single filers and $30,000 for joint filers, per beneficiary, for tax year 2022, and $20,700 for single filers and $31,000 for joint filers for tax year 2023. The subtraction is claimed on the appropriate lines of the state income tax return and on Form DR 0104AD (Subtractions from Income Schedule). An individual who is an employer, either as a sole proprietorship or as a partner or shareholder in a partnership or S corporation, cannot claim both a subtraction and a credit for the same contribution.
The account holder must add to their FTI for the taxable year of the distribution, any distributions, refunds, or withdrawals from a qualified state tuition program for any reason other than one of the following qualifying reasons: (1) to pay qualified higher education expenses; (2) as a result of a beneficiary’s death or disability; (3) as a result of receiving a scholarship during the tax year in an amount equal to or greater than the distributions, refunds, or withdrawals made; or (4) as a result of a change in the designated beneficiary for the account. The addition amount for the non-qualifying purpose is displayed in Box 3 of IRS Form 1099-Q (Payments from Qualified Education Programs) and must be reported on Form DR 0104 (Colorado Individual Income Tax Return) or Form DR 0105 (Colorado Fiduciary Income Tax Return).
529 employer contribution credit.
An income tax credit is available for an employer who contributes to an employee’s 529 qualified state tuition program account with CollegeInvest. The credit is allowed only to employers doing business in the state, and the employer may be a C corporation, S corporation, partnership, or sole proprietorship. The credit is allowed for contributions that meet all of the following requirements: (1) the contribution is made by the employer; (2) the contribution is made to a 529 college savings plan with CollegeInvest; (3) the account owner is an employee of the taxpayer; and (4) the contribution is made in an income tax year commencing on or after January 1, 2019, but prior to January 1, 2032. An employee is any person in the employment of an employer for salary or for hourly wages; whether full-time or part-time; and whether temporary or permanent. The credit is allowed irrespective of the named beneficiary of the account if the account owner is the employee.
The allowable credit is 20% of the contribution with a maximum credit of $500 per year. Employers can claim the credit by filing with their state income tax return Form DR 0289 (Employer Contributions to Employee 529 Qualified State Tuition Program) and the appropriate credit schedule for their entity type. In the case of an employer that is a partnership or an S corporation, the credit passes through to the partners or shareholders. The partners and shareholder can claim their share of the credit by completing and submitting Form DR 0289 and the appropriate credit schedule with their tax return.
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