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2011 Tax Changes for California Taxpayers with Child Dependents

California taxpayers with child dependents should be aware of very two important California income tax changes for tax year 2011.

Children

Number one of the 2011 California child-related income tax changes is that the dependent exemption credit on the California tax return was only $99 per dependent for tax year 2010, but for 2011 it has been raised to $315 per dependent. This amounts to a pretty nice tax cut for California taxpayers with kids, for example if you have three child dependents this would be a tax cut of $648 on your California income taxes (assuming that you have enough tax liability to "use up" the entire credit).

So that's the good news...

The not-as-good news for California taxpayers with children is that the California Child and Dependent Care Credit, a California tax credit for taxpayers who pay child care expenses for their children, has been changed for tax year 2011 from a refundable tax credit to a non-refundable tax credit.

Without getting too deep into "tax world," the difference between a non-refundable tax credit and a refundable tax credit is that a non-refundable tax credit can only reduce your tax liability to zero, whereas a refundable tax credit can actually be paid out to you in your tax refund even if your tax liability is already at zero.

For previous years, the California Child and Dependent Care Credit was a refundable tax credit, allowing lower and middle income taxpayers without much if any California tax liability to receive a tax refund based upon the California Child Care Credit itself. For some taxpayers, the Child Care Credit resulted in a refund of up to $525 per child, even if, as noted, the taxpayer had no tax liability.

For tax year 2011, the California Child and Dependent Care credit was changed to a non-refundable tax credit, meaning that the credit can only reduce your tax to zero, and cannot be "paid out" in your refund once your tax is at zero.

While this may seem like an academic discussion, the change of the CA Child Care Credit from refundable to non-refundable will actually will make a big difference in the California tax refunds of many lower and middle income taxpayers: to get to the bottom line here, lower and middle income taxpayers claiming the California Child Care Credit can expect their tax refunds to be smaller this year than last year.

(For a comprehensive list of all the most important 2011 tax code changes, visit our 2011 tax code changes page.)

In summary, the Franchise Tax Board of California increased the tax benefit of having child dependents on the one hand, by raising the dependent exemption credit, but then on the other hand, FTB reduced the tax benefit of having children for taxpayers who claim the Child Care Credit, by changing the credit from a refundable to a non-refundable tax credit.

For the majority of California taxpayers, the increase in the exemption credit will be more beneficial than the reduction/change in the Child Care Credit, but certainly for lower and middle income taxpayers who have been receiving a refund based upon the California Child Care Credit, the fact that these taxpayers may now receive a smaller California tax refund may not be welcome news.

For help with maximizing the California tax benefits of having child dependents, visit a Pronto Income Tax office today. We study this stuff all year so that we can serve you with excellence at tax time!