Many millionaires are certainly paying at least 30 percent of their income in taxes, a goal President Obama set out in last year’s State of the Union address. But they’re more likely to be doctors, lawyers and people working in the financial services industry who get the bulk of their earnings in the form of paychecks.

Partners in private equity firms and hedge fund managers, on the other hand, earn much of their money as a share of their funds’ earnings. And that income gets preferential tax treatment as so-called carried interest.

A similar special tax treatment still holds true for Mr. Buffett as long as the bulk of his income comes from his investments and not a paycheck. The long-term capital gains rate for incomes over $400,000 is 23.8 percent, including the Medicare surcharge. That’s a far cry from the top marginal tax rate on income above that amount of 40.5 percent, which includes a 0.9 percent Medicare surcharge on earned income.

How are people going to react to all of this? Here is advice and observations from some experts in wealth management:

INCOME ISSUES This year, income taxes are going up for almost everyone, even if the taxes go by different names. Greg Rosica, a tax partner at Ernst Young and a contributing author to the firm’s tax guide, laid out five tiers where taxes are increasing.

The bottom one includes everyone who receives a paycheck and is affected by the 2 percentage point increase in the payroll tax. In the top one are couples making more than $450,000 a year, who will pay higher rates on income and investments, be subject to the Medicare surcharges of 0.9 percent on income and 3.8 percent on investments and lose some portion of their itemized deductions and exemptions.

Using assumptions on wages and deductions from Internal Revenue Service statistics, Mr. Rosica calculated that a person making $500,000 a year would pay $9,124, or 7 percent, more in taxes in 2013. A couple earning $1 million a year in wages and business and investment income would pay $53,350 extra, or 20 percent more in taxes.

“It’s hitting every line item of income,” he said. “It’s phasing in all the way up the scale.” This has made strategies that defer income more attractive than they were in the years when George W. Bush was president and tax rates were historically low. “At the base level, it’s 401(k) plans. Or, for the self-employed person or person who sits on boards, they can defer into a SEP I.R.A.,” a retirement plan for the self-employed, or into one’s own defined-benefit plan, said Christopher Zander, the national head of wealth planning at Evercore Wealth Management. “That’s very attractive. Even if income tax rates are higher later, I think the tax deferral” makes up for that increase.

There are risks, though. People could defer too much into a qualified plan, like an I.R.A., and end up having to pay a penalty if they need the money before they turn 59 1/2 years old. Or they could put too much into a company-sponsored deferred-compensation plan and face two problems. The company could go bankrupt, as Lehman Brothers did, and they could lose that money, or the payout schedule they selected when they put the money in — say 10 annual payments at retirement — may end up providing them with too much or too little income.

CARRIED-INTEREST CONUNDRUM At the very top of the income ladder, the group for whom the changes in the tax code will not hurt as much includes people like hedge fund managers and private equity partners whose earnings come in the form of carried interest. The income for these people comes from the fees they charge, and that income will continue to be taxed at a lower rate than ordinary income.

“Carried interest rules are helpful for hedge fund managers, but they’re incredibly helpful for private equity guys,” said Richard A. Rosenberg, a certified public accountant and co-founder of RR Advisory Group, which advises hedge fund and private equity partners. “Private equity funds typically get the stronger treatment because there is less turnover and the holding periods of the funds are longer.”

How the partners’ share is taxed depends on how the underlying investments are taxed. In the case of private equity, many of the investments are held for longer than a year. Through last year, the distributions would have been taxed at the long-term capital gains rate, which was 15 percent. Even now, the rate is still a relatively low 20 percent for an individual earning above $400,000.

Article source: http://www.nytimes.com/2013/01/12/your-money/taxes/coping-with-the-new-tax-law-even-for-the-richest-of-the-rich.html?partner=rss&emc=rss