In the American Taxpayers Relief Act of 2012, there was very little “relief” for upper income taxpayers.  Many of those individuals with larger resources feel that they were a target of that tax act.  The Joint Committee on Taxation estimates that these upper-income taxpayers will pay approximately $620 billion of increased taxes over the next decade.
The tax amounts that are raised are the result of increasing the top income tax rate to 39.6% and the top capital gains rate to 23.8%.  There also are phase-outs of personal exemptions and a 3% floor on itemized deductions.  With the major changes in ATRA that increased taxes on taxpayers with higher incomes, there are compelling reasons for these individuals to reduce their adjusted gross income (AGI).

Single Persons

There are multiple levels of income that will lead to potential tax increases.  The 2013 alternative minimum tax exemption of $51,900 is gradually phased out for incomes over $115,400.  A single person with AGI over $200,000 is subject to the 3.8% Medicare tax on passive income.
With AGI over $250,000, the 3% floor on itemized deductions is applicable.  Excess income over that amount is multiplied by 3% and up to 80% of itemized deductions may be lost due to that floor.
Finally, single persons with taxable incomes over $400,000 are subject to the top 39.6% income tax rate and 23.8% capital gains tax rate.  These individuals who have passive income will also be subject to the Medicare tax for a total tax on passive income of 43.4%.

Married Persons

Married persons will also be subject to higher taxes as income increases.  The alternative minimum tax exemption of $80,800 for 2013 is phased out starting at incomes of $153,900 and above.  At $250,000 in AGI, the 3.8% Medicare tax applies to passive income.  Over $300,000 in AGI, the 3% floor on itemized deductions applies and the personal exemption is phased out.
Finally, with $450,000 of taxable income, a married couple pays 39.6% income tax and 23.8% capital gains tax.  In addition, a high income person with passive income will also pay the Medicare tax for a total 43.4% tax rate.

General Income Tax Planning

Upper-income persons will be discussing various planning strategies with their CPAs and other advisors.  First, the recommended strategy will be to fund retirement plans to the maximum levels.  Second, the capital gains tax rates are still much lower than ordinary income rates and therefore it is preferable if possible to receive income taxable as capital gain.
Finally, tax-free income through municipal bonds will continue to be an option.  However, with the current very low interest rates on bonds and the potential for inflation over the next decade to reduce bond principal values, this is not a highly attractive investment.