* The frequencies with which various itemized deductions, tax credits, and
tax preference items occur as certain percentages of income (Tables 9 and 10); and
The increase in the effective tax rate is primarily due to a decrease in
tax preference items such as income from bank-owned life insurance.
*
Tax preference items. For individuals, the proposal would replace the seven existing tax brackets with just three: 10%, 25% and 35%.
The Alternative Minimum Tax (AMT) is imposed on taxpayers whose tax deductions and
tax preference items reduce their taxable income below a specified level.
Two of the more common
tax preference items are accelerated depreciation and certain tax-exempt interest.
(1) Their taxable income is $135,000 (2) Their AMT adjustments to taxable income are 30,000 (3) Their
tax preference items total 57,000 $222,000 (4) Their exemption amount is $52,950 ($70,950-$18,000) ($18,000 = 25% x ($222,000-$150,000)) (52,950) (5) Their alternative minimum taxable income is $169,050 (6) Their tentative minimum tax is $43,953 The excess of the Ginsburgs' tentative minimum tax ($43,953) over their regular tax ($26,544) is $17,409.
at 430-32 (listing "
tax preference items that were added to the adjusted gross income base").
A case in point was a change proposed by the mining industry in the early 1990s to expand the AMT credit to include AMT that was attributable to permanent differences (
tax preference items) between regular tax and AMT.
Many
tax preference items (such as excess depletion allowances and interest on private activity bonds) result in permanent differences.
The AMT changes these tax benefits into "
tax preference items" which are in turn added back to a company's regular taxable income.
[2] Includes tax-exempt interest and
tax preference items subject to alternative minimum tax.
Tax preference items, which include portions of deductions or exclusions from income, are added back to the taxpayer's taxable income in computing alternative minimum taxable income (AMTI), which is the basis on which taxpayers compute the tentative minimum tax.
