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What is a Tax Preference Item?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 10 November 2016
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    Conjecture Corporation
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Tax preference items are any taxable transaction or asset that would make a taxpayer subject to an alternative minimum tax. Essentially, such an item is designed to ensure that the task of paying taxes includes organizations that usually have a wide range of deductions, exemptions and credits. The item is added back into the adjusted gross income, thus creating a higher amount that is subject to taxes.

All taxpayers are potential candidates for the application of a tax preference item. Individuals who have extremely high levels of income may be subject to the inclusion of items on the tax return. The source of the income is not really much of a factor. For example, the individual may receive a lucrative salary, receive profits from investments, and also have other sources of taxable income that add up to a considerable amount of annual revenue.

Along with individuals, corporations may also be subject to a tax preference item on the return. This will depend on the amount of exemptions and deductions that are listed on the return. Trusts and estates may also be subject to the inclusion of such items on the tax return, based on the overall financial activity for the period covered.

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The alternative minimum tax, also known as AMT, was created and is administered by the Internal Revenue Service of the United States. While at one time the inclusion of a tax preference item only impacted a small number of taxpayers within the USA, the practice has become more commonplace. Generally, a tax preference item will become necessary when a large number of personal exemptions are claimed on the return, or there appears to be an inordinate amount of itemized deductions or medical expenses listed for the period cited. While not designed to create a burden for persons who have legitimate deductions, the tax preference item is designed to counteract the abuse of tax shelters and deductions as a means of minimizing the amount of taxes owed.

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