Definition of tax preference items

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.