Tax Preference Item

Item specified by the tax law that a taxpayer must include when calculating the Alternative Minimum Tax (AMT). Preference items include:

1. Addition of personal exemptions.

2. Addition of the standard deduction.

3. Addition of itemized deductions claimed for state and local taxes, certain interest, most miscellaneous deductions, and part of medical expenses.

4. Subtraction of any refund of state and local taxes included in gross income.

5. Changes to accelerated depreciation of certain property.

6. Difference between gain and loss on the sale of property reported for regular tax purposes and AMT purposes.

7. Addition of certain income for incentive stock options.

8. Change in passive activity loss deductions.

9. Private activity bond interest.

10. Addition of certain depletion that is more than the adjusted basis of the property.

11. Addition of part of the deduction for certain intangible drilling costs.

12. Addition of tax-exempt interest on certain private activity bonds.

Taxpayers may have to pay the alternative minimum tax if their taxable income for regular tax purposes, combined with these adjustments and tax preference items, is more than $58,000 for a married couple filing jointly, $40,250 for singles or heads of household, and $29,000 for married couples filing separately.

Tax deduction giving the holder special tax benefits, which must be computed in calculating the Alternative Minimum Tax (AMT) liability under federal tax laws. The AMT is due if the amount of tax owed using the AMT calculation is greater. Preference items include, for individuals, capital gains from exercise of stock options, and for corporations, deductions for accelerated depreciation, investment tax credits, and increases in loan loss reserves by banks and savings institutions, and many more.

Certain types of Income or deductions that are added to adjusted Gross Income to calculate the Alternative Minimum Tax.
Examples: Tax preference items include:

• Depreciation on Real Estate to the extent it exceeds 40-year Straight-Line Depreciation

• Accelerated Depreciation on leased Personal Property to the extent it exceeds Straight-Line Depreciation

• bargain element of an incentive stock option

• certain rapid write-offs

• losses from passive activity investment

• certain itemized deductions (state and local income taxes, real estate taxes, medical expenses not greater than 10% of adjusted gross income)

• miscellaneous deductions in excess of 2% of adjusted gross income

• all interest expense, except home mortgage interest and investment interest, to the extent of net investment income

• interest on certain tax exempt bonds issued after August 7, 1986

• the excess of value deducted over the cost of property given to charitable organizations.

Those items of income, deduction, or tax credit that are deemed to reflect a preference in the tax law for the taxpayer benefited by the item. Since the tax-preference items may result in minimal tax liability for certain taxpayers notwithstanding substantial gross income, a minimum tax is imposed on the aggregate of the tax-preference items. This tax provision attempts to insure a minimum tax liability for each taxpayer. I.R.C. §§56-57.