Tax Preference Item


DEFINITION of 'Tax Preference Item'

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.

BREAKING DOWN 'Tax Preference Item'

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.

  1. Municipal Bond

    A debt security issued by a state, municipality or county to ...
  2. Alternative Minimum Tax - AMT

    A tax calculation that adds certain tax preference items back ...
  3. Intangible Cost

    An unquantifiable cost relating to an identifiable source. Intangible ...
  4. Private Activity Bond - PAB

    Tax-exempt bonds issued by or on behalf of local or state government ...
  5. Duty Free

    Goods that international travelers can purchase without paying ...
  6. Tax Deductible Interest

    A borrowing expense that a taxpayer can claim on a federal or ...
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