Most of the new law provisions become effective in 2002. But a few benefits, including accelerated write-offs for business equipment, were made retroactive to the 2001 tax year, which will affect 2001 tax returns that are being filed this tax season.

Businesses will get the lion's share of the new law's tax relief. But millions of individuals will find some significant benefits in the new law. The "Job Creation and Worker Assistance Act of 2002" (H.R. 3090) is projected to cost $42 billion over 10 years, according to the Congressional Joint Committee on Taxation.

Bonus Depreciation

The biggest new law benefit allows businesses to claim greater first-year write-offs for purchases of computers, machinery and other equipment. Businesses are eligible to claim an additional first-year depreciation deduction equal to 30 percent of the cost of the equipment. This "bonus depreciation" applies to most types of business property – except for real estate – purchased between Sept. 11, 2001 and Sept. 10, 2004.

The Joint Tax Committee gave the example of a business that acquired $1 million in equipment in 2002. The business would be allowed an additional first-year depreciation deduction of $300,000. The remaining $700,000 of the adjusted basis would be recovered in 2002 and subsequent years under the usual depreciation rules.

To enable taxpayers to reap the benefit of the 30 percent bonus depreciation for new purchases of cars used for business, the new law temporarily raises the ceiling on first-year depreciation for passenger autos from $3,060 to $7,660.

Because the depreciation provision was made retroactive to purchases since Sept. 11, 2001, many businesses who purchased equipment late last year will be eligible for extra tax deductions on their 2001 income tax returns.  Those who already filed their 2001 return will be able to take advantage of the new law benefit by filing an amended tax return.

New Break for Teachers

School teachers who use their own money to buy classroom materials get a new break. In the past, most teachers wound up without any tax break for such out-of-pocket expenses because job-related costs are treated as "miscellaneous" itemized expenses, which are deductible only to the extent they exceed two percent of adjusted gross income.

Under the new law, elementary and high-school teachers will be allowed to deduct up to $250 of supplies they buy for their classroom each year without having to itemize deductions. The legislation authorized the deduction for 2002 and 2003.

Eligible expenses include books, supplies, equipment, and computer hardware and software.

Those eligible for the credit are kindergarten through 12^th grade teachers, counselors or principals.

Expiring Tax Breaks

The new law extends a long list of temporary tax breaks that recently expired or were scheduled to expire this year. :

Alternative Minimum Tax: Of most relevance to individuals is a provision that protects most personal tax credits, including the dependent-care credit and the Hope and Lifetime college tuition credits, from being reduced by the alternative minimum tax. The provision had expired at the end of 2001. The new law extends the protection through the end of 2003.

Medical Savings Accounts: The new law extends the pilot program for Medical Savings Accounts through the end of 2003. The program was scheduled to expire at the end of 2002.

MSAs were created by Congress in 1996 to help workers covered by high-deductible health-care plans. MSAs can be used to pay out-of-pocket medical bills that fall below the policy deductible. Contributions to MSAs are deductible and withdrawals are tax-free when used to pay eligible medical expenses. Any unused funds can be carried over from year to year.

President Bush and Congressional Republicans are hoping to expand MSAs in future legislation and make them widely available. Currently, only a narrow segment of the population is eligible to take advantage of MSAs: self-employed workers and employees of small businesses (employing no more than 50 workers) who are covered by high-deductible health insurance plans. Medicare recipients are also eligible under certain circumstances.

Most Democrats are opposed to expanding MSAs, contending that the tax-sheltered accounts would benefit only the healthiest and most affluent of individuals and would drive up the cost of health-insurance for everyone else.

Other tax breaks that were extended include:

• Credit for the purchase of electric vehicles
• Work Opportunity Tax Credit
• Welfare-to-Work Tax Credit
• Clean-fuel vehicle deduction
• Credit for producing electricity from wind, biomass and poultry litter
• Taxable income limit on percentage depletion for marginal well production
• Tax incentives for investment on Indian reservations
• Modification of exceptions under Subpart F for active financing income

Net Operating Losses

To help businesses that have suffered during the economic slowdown, the new law temporarily extends the carryback period for net operating losses to five years, from two years.

The provision applies to losses arising in taxable years ending in 2001 and 2002.

Form 1099

The new law allows banks, brokers and other issuers of Form 1099 tax information reports to send the year-end tax statements electronically if the recipient consents.

So expect your financial institution to be asking for your permission to send the 1099 online next tax season. Issuers have been forced to send the statements by U.S. mail because the law didn't allow for online distribution.

Technical Corrections

The new law makes numerous "technical corrections" to the Tax Relief Act of 2001 as well as some earlier tax bills.

"Catch-Up" Retirement Plan Contributions: Beginning in 2002, the Tax Relief Act of 2001 allows workers age 50 and over to make contributions beyond the normal limits to 401(k)s and similar employer retirement plans. The economic stimulus legislation allows individuals to start making these "catch-up" contributions at the beginning of the year in which they're scheduled to reach age 50. You don't have to wait until your birthday to start.

For example, say, you're going to turn age 50 on Nov. 30, 2003. You'll be eligible to start making catch-up contributions to your 401(k) plan in January 2003.

Education Breaks: In another clarification of the 2001 tax act, the economic stimulus legislation makes clear that beginning in 2002, families are no longer automatically disqualified from claiming the Hope or Lifetime college tuition credit for a student in the same year that money is withdrawn from the student's education savings account (formerly known as education IRAs.)

The one proviso is that education savings account withdrawals can't be used for the same expenses for which the Hope or Lifetime credit is claimed.

Adoption Credit: The new law clarifies how much of an adoption credit is allowed beginning in 2002 for expenses that were incurred in prior years. The Tax Relief Act of 2001 increased the adoption credit to $10,000 per child beginning in 2002, up from $5,000 ($6,000 for special needs children.)

But the 2001 tax act didn't clarify the dollar limits that apply for expenses incurred prior to 2002 for adoptions that didn't become final until after 2001. The issue is important for parents who incurred expenses before the adoption became final. In such cases, they need to wait until the year after the expenses were incurred to claim the adoption credit.

SEP PLANS: The new law corrects a technical mistake in the 2001 tax act to reflect Congress' intent to increase the annual contribution limit to Simplified Employee Pension (SEP) plans.

As a result, the SEP contribution limit for 2002 jumps from 15 percent to 25 percent of compensation, up to a maximum deposit of $40,000.

New York Tax Relief

The new law creates special "Liberty Zone" tax breaks to help revitalize the area of lower Manhattan devastated by the Sept. 11 terrorist attacks.

The Liberty Zone is the area located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with East Broadway).

Some tax relief is also available for businesses whose workplaces were destroyed or damaged due to the Sept. 11 attacks and were forced to locate elsewhere in New York City.