What is a tax preference item for purposes of the alternative minimum tax?

A tax preference item for purposes of the alternative minimum tax (AMT) is a specific type of income or deduction that can lead to a higher tax liability under the AMT system compared to the regular income tax system. Tax-exempt interest on private-activity municipal bonds is considered a tax preference item because it is not subject to regular federal income tax, thus potentially allowing a taxpayer to save on taxes. However, for AMT purposes, this type of interest is added back to income, which can increase the taxpayer’s alternative minimum taxable income (AMTI) and, subsequently, their AMT liability.

In contrast, tax-exempt interest on general municipal bonds is not treated as a preference item under AMT, as it does not trigger additional taxes in the way private-activity bonds do. Qualified dividends and long-term capital gains are taxed at preferential rates under the regular tax system but are not classified as tax preference items that affect AMT calculations. Therefore, among the options provided, the interest from private-activity municipal bonds is distinctly relevant for AMT considerations, marking it as the correct choice.