Of course, many investors didn't incorporate such prospective levies into their investment strategies and tax planning, since those taxes wouldn't take effect until January 1, 2013, and there were ample questions about whether the ACA would survive judicial review. However, once the U.S. Supreme Court upheld most of that law on June 28, the need for thoughtful tax planning before year-end took on greater urgency.

After all, long-term capital gains taxes are slated to jump from 15% to 20% in 2013, and top earners may see their taxes on ordinary dividends rise from the current 15% to 43.4% if there are no changes in the current tax law—the highest rate since the mid-1980s. (See Chart 1.)

A Muni-Splendored Thing
As presidential candidates debate the wisdom of planned tax hikes and federal tax officials scramble to codify the tax provisions of the ACA, one investment option that has drawn greater attention is to allocate more funds into tax-free municipal bonds, since interest from those bonds appears likely to remain exempt from federal taxes in most cases. [It should be noted that the income from municipal bonds may be subject to the alternative minimum tax, however.]

Of course, much could happen between now and Election Day. But suppose Congress makes no changes in the current law and the top marginal tax bracket rises from 35% to 39.6% in 2013. In that case, the taxable equivalent yield of a hypothetical municipal bond with a yield of 4.29%² would be more than 6.98%—a rather enticing prospect in a slow-growth environment fraught with uncertainty.

The Greats of Roth
Another option advisors may want to broach to their clients is converting a traditional IRA to a Roth IRA, which would potentially enable tax-free withdrawals.

For example, suppose a working couple in the top tax bracket with a large IRA and an adjusted gross income above $250,000 has $50,000 of net investment income. (See Table 1 for examples of what will and will not be considered investment income.) If that couple converted their traditional IRA to a Roth IRA this year using their investment income to cover the taxes, not only would they avoid the 3.8% investment income surtax that takes effect next January, but also they would have a retirement account potentially free of federal income taxes. This strategy may especially appeal to investors who believe taxes will go up if the federal fiscal problems become worse in the years ahead.

Shift and Shout
While the specter of higher tax bills may spur chilly feelings in the summer, there are a few more options worth adding to your to-do list. First, talk to your financial advisor, accountant, and/or tax attorney. Depending on the income-generating investments in your portfolio, you may want to look at shifting income in 2012 in order to reduce net investment income and adjusted gross income in 2013 and beyond. Also consider income acceleration strategies, such as harvesting capital gains or taking retirement distributions in 2012 before the taxes on them go up.³

Last, but not least, don't forget to contribute as much as you can to a retirement plan on a pretax basis, whether it's a 401(k), a 403(b), or a 457 plan. Not only will that help lower your MAGI, but also it potentially might reduce or eliminate your exposure to the 3.8% surtax.