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Current VBR MP3 codecs have gotten impressively good. The suggested encoding method for MP3s (for software that uses the LAME encoder [not iTunes]) translates to 192k VBR. Those files can only be distinguished from lossless by someone who knows a song very well, knows what to listen for in regard to MP3 artifacts, and has very good speakers in optimal conditions. I have personally done this test on hardware similar to the original poster, and was unable to distinguish between the MP3 and the lossless file, and I do know what to listen for.
AAC options in iTunes are similar. 128k VBR is very nearly as good as 192k VBR MP3, and 256k is arguably better.
If your only target listening environment is your BMW, it's worth noting that the speaker layout is far from ideal, and any road noise at all will wipe out those subtle differences. Any format encoded at 128k or above should be satisfactory in a moving vehicle.
Summary: Using iTunes, set it to 256k AAC. Using something else like EAC or Max or CDEx or anything else that uses the LAME MP3 codec, use a setting called "transparent" or "--alt-preset standard" or "-V2 --vbr-new". (Those three options produce the same results.) This will give you great sound and not take up too much space.
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