Child and Dependent Care example

I encountered an interesting situation with the Federal and CO child care credits.

A taxpayer wanted me to amend his 2010 return to increase his sales tax deduction for the tax he paid on a car he bought in 2010. In looking at the amended returns, it made no difference on the Federal return, but INCREASED his CO tax by $7!

Here’s what’s going on – the Federal credit is non-refundable.
The CO credit is refundable and is a percentage of the Federal credit.

Increasing the itemized deductions reduced his taxable income which reduced his tax which reduced his Federal child care credit (since it’s limited to the tax liability) which reduced his refundable CO child care credit.

If the taxpayer has child and dependent care expenses and is itemizing deductions, you need to look at form 2441 page 1 lines 9 and 10.
If line 9 is greater than line 10 (meaning the credit is being reduced), it may be worthwhile to do a what-if using the standard deduction (or reducing the itemized deductions) which will increase the Federal child care credit which will increase the CO child care credit.
In the case of this taxpayer, using the standard deduction made no difference to the federal return but increased the CO refund by $27.

Not at all obvious!

Steve Blendermann
AARP Tax-Aide Program
Technology Coordinator
Boulder and Broomfield Counties