In Colorado contributions to the state 529 plan are deductible from State income taxes. These income taxes are recaptured if a non qualified withdrawal from the plan is made.
My husband (the beneficiary of our 529 plan) also appears to be eligible for the AOTC (American Opportunity Tax Credit).
If we pay for his full tuition expenses from the 529 plan, I understand that under the double dipping rules the part of his tuition that is also refunded via the AOTC will not gain preferential capital gains treatment (though will avoid the 10% penalty).
However it is not clear to me if the income tax saved from these deposits is also recaptured on such an unqualified withdrawal, I know for income tax recapture there are some exceptions such where unqualified withdrawals are not eligible for recapture (such as scholarships or disability) but I am not clear if the AOTC double dipping rule is one of these exceptions?
I ask as it appears that otherwise we will likely not be able to make use of all of the 529 funds, so it is preferential to withdraw without the 10% penalty now than end up paying it later. But it is not clear what happens with the income tax recapture for when we file taxes this year.
(Please note before someone suggests, we have (and can have) no children and no other relatives or friends who will go to college so naming a new beneficiary is not feasible.)