Juliet, you certainly chose a monster. Believe it or not, I have one even worse than this, except that it's B&W. I did a little messing around with your original to see what I could pull out, and I'll post it for you. I worked on little bits here and there to give you an idea of good ways to pull out information without getting too much of a "painterly" look and keep a little texture.
I usually start with a 7px brush set at 70% opacity and a slightly blurred edge. I'll find an area that looks close to what I image the original color might be and clone around that area until I get color that looks fairly consistent but still has a bit of texture. Once I have that area, I work with the patch tool in small increments to pull more of the color and texture into damaged areas. If I have a discolored area, I clone first, then if I've lost too much texture, I'll go back with the patch tool.
I just played a little with his hair. I use the smudge tool and try to pull the dots and everything into the shape I think the hair might be - the direction of the strands. Then I add color with the brush tool and smudge that as well. There are a number of really good tutorials online for creating hair that have helped me so much. Hair is DEFINITELY NOT my strong point.
I think you're right about the background being a Christmas tree. I'd follow the color, smooth it out a little and not worry too much about defining anything. Just leave it a pleasant blur of colors. You already have a start on that. I did note that you have a few obvious cloned areas. There's less of that if you use a lower opacity small brush and come at your color from several directions.
Tedium is the word! Every time I get frustrated and try to do too much at once I end up with crap. As I said, my sample is just bits and pieces, but it's just to show you how I'd attack it differently. Once you get your skin areas smooth, if there are shading problems, you can dodge and burn at a very low opacity to get your shapes back. I've gotten to the point that I use the clone and patch tools almost exclusively, especially on skin.
Good luck! (P.S. my little boy is taking forever, too. Finding features under all the polka spots is a real challenge. I'll be posting him before long, and YOU can give ME feedback!)
Here's my example.
GK
