Definition of 'Excise Tax'
1. An indirect tax charged on the sale of a particular good.
2. A penalty tax applied to ineligible transactions in retirement accounts. This penalty is assessed by and paid to the Internal Revenue Service (IRS).
Investopedia explains 'Excise Tax'
1. Excise taxes are considered an indirect form of taxation because the government does not directly apply the tax. An intermediary, either the producer or merchant, is charged and then must pay the tax to the government. These taxes can be categorized in two ways:
- Ad Valorem: A fixed percentage is charged on a particular good.
- Specific: A fixed dollar amount dependent upon the quantity purchased is charged.
2. Here are some examples of situations in which excises taxes are charged on transactions in retirement accounts:
- A 6% excise tax applies to excess IRA contributions that are not corrected by the applicable deadline.
- A 10% excise tax applies to distributions from an IRA, qualified plan or 403(b) account that occur before the participant reaches age 59.5.
- A 50% excise tax applies to required minimum distribution amounts not withdrawn by the applicable deadline (referred to as an excess-accumulation penalty).