According to Tech Guy Labs….
“Apple’s AAC is better than MP3, [but comes down to personal preference.]
Start at 128kbps. But go at least 160kbps, even with AAC. Makes a significant difference, but only takes up 25% more space. Patrick Norton [of Revision3] says that 320kbps is the max you can encode and hear a difference, . Leo says you can’t really hear any difference above 192. But Leo is older than Patrick.
Use Variable Bit Rate encoding (VBR) will waste less space and is an option in iTunes.