A type of income, normally tax-free, that may trigger the alternative minimum tax (AMT) for taxpayers. Tax preference items include private-activity municipal-bond interest, the qualifying exclusion for small business stock and excess intangible drilling costs for oil and gas, if this amount exceeds 40% of AMT income. Tax preference items are added to the amount of AMT income in the tax formula.

Investopedia Says:
Like the AMT itself, tax preference items are designed to prevent high-income taxpayers from being able to avoid too much income tax via participation in certain activities. For example, investors who own private-activity bonds issued after August or September of 1986 must declare all income received from these bonds, minus investment expenses. This rule thereby prevents taxpayers from shielding all of their investment income in this type of bond issue.

Related Links:
Investing in these bonds may offer a tax-free income stream but they are not without risks. The Basics Of Municipal Bonds
Learn the rules every investor should know before buying into this "tax-free" investment. Avoid Tricky Tax Issues On Municipal Bonds
Save yourself money by lowering the amount of tax you owe. How To Cut Your Alternative Minimum Tax
Oil and gas investments can provide unmatched deduction potential for accredited investors. Drilling For Big Tax Breaks

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