Tobacco products, gasoline, and alcoholic beverages are only a few examples of products subject to excise taxes, which are sales taxes, imposed by law. Transportation fuel, plane tickets, cigarette products, and other items and services are all subject to a federal excise tax.
What an Excise Tax Is and How It Operates
Businesses are the primary targets of excise taxes. Many of them are paid by business owners, who in turn raise prices for customers. Retailers must account for excise taxes when setting product prices, ultimately driving up final consumer prices.
Because of this, most excise taxes are not always apparent to customers. However, some excise taxes, such as those imposed on certain retirement account activities and property, are paid directly by customers.
Excise taxes can be enacted by federal, state, and municipal governments. Revenue from excise taxes is very insignificant compared to income tax, which is the principal source of revenue for both federal and state governments.
Excise Taxes Assessed Based on Market Value
According to value is what the Latin phrase ad valorem means. A portion of the assessed value is subject to the ad valorem tax. As a result, an excise tax is levied according to the item's market price.
As an illustration, the Internal Revenue Service imposes a ten percent excise tax on indoor tanning services. If a tanning establishment costs $100 for a session, it must pay an excise tax of $10 to the Internal Revenue Service.
A similar excise duty of $20 would be due if the firm charged $200 for tanning services. Firearms are subject to a 10% ad valorem excise tax, plane tickets are charged a 7.5% levy, and large vehicles are assessed a 12% levy. 5 Ad valorem excise taxes are another name for property taxes.
Particular Excise Taxes
An excise tax is a fixed levy assessed on each unit sold of a particular product. Tobacco products, alcohol, transportation, and fuel are all subject to federal excise taxes.
Tobacco products, alcoholic beverages, and other "vices" are commonly subject to federal and state "sin taxes," which drive up retail prices. For instance, a pack of 20 cigarettes in New York is subject to a state-level excise tax of $4.35. With the additional dollar of federal tax, just the excise taxes amount to $5.36. The average person feels a significant influence from these taxes.
Penalties for Investing in Retirement Plans
It's important to note that some retirement account transactions can incur excise taxes. The punitive nature of these levies is well-known to the general public. Contributions made to an IRA that are more than what is allowed will incur a 6% excise tax if the overpayment is not rectified before the due date.
Withdrawals from some IRAs and other eligible plans before age 5912 are subject to an excise tax penalty of 10%. When investors fail to withdraw the statutory RMDs from some retirement accounts, they are subject to a 50% excise tax penalty. When you reach age 72, you must take required minimum distributions from your conventional IRA and maybe other tax-deferred retirement savings plans.789
Which Entities Must Make Excise Payments?
Certain products and services, such as gasoline and alcohol, are subject to excise taxes. Companies are responsible for making these tax payments on their own. The consumer, who may or may not be aware that they are paying this tax to the vendor, will likely be hit with this additional cost. In the petroleum sector, it is standard practice to add excise taxes to the amount customers pay at the pump.
What is an Excise Tax?
The federal government imposes an excise tax on several purchases. The store owner may or may not factor it into the asking price. Unlike other taxes, such as income taxes, customers are not responsible for paying these levies out of their own pockets. Common examples of products subject to federal excise taxes include gasoline, airline tickets, cigarettes, and alcoholic beverages.
In Conclusion
As Benjamin Franklin famously put it, nothing in life is guaranteed except for death and taxes. It's also the case that there are various types of taxes to pay. While most people have a general idea of income and sales taxes, the concept of excise taxes may be less familiar. However, this does not exempt you from paying them even if you are unaware of their existence. Retailers often include these levies in the final price of specific products and services. Because of this, you could inherit them without realizing it.
