On some tax forms, you may notice the term "excise tax." What is an excise tax? Who has to pay an excise tax? Where does an excise tax come from? Does it have any effect on your income tax return? Here is a quick primer on what excise taxes are and how they work. 

How Do Excise Taxes Works

An excise tax is a government tax levied on a particular good or service. While the exact products that are subject to an excise tax vary from area to area, this tax is usually levied against high-revenue products such as oil, cigarettes, and gasoline.

In some places, an excise tax may also be imposed on certain activities that are designed to increase revenue. Gambling is an activity that is subject to an excise tax in some states. In fact, state governments impose excise taxes frequently, but the excise tax rate can vary widely depending on the state. Some states that do not have a state income tax use excise taxes to make up for a revenue shortage. On occasion, the federal government also imposes excise taxes on certain goods.

Who Pays Excise Taxes?

In general, the cost of an excise tax is shared between manufacturers, distributors, and consumers. Some taxes are paid by manufacturers and distributors directly, who then pass on these higher costs to the consumers in the form of higher retail prices.

For example, cigarettes carry a fairly high excise tax, which is often divided between an actual tax that is visible to the buyer and a higher purchase price. Since manufacturers have to pay an excise tax on some of their substances, they often attempt to recoup these fees by increasing the price of these items.

Can You Deduct Excise Taxes?

For the most part, excise taxes are nondeductible on an IRS tax return. However, the federal government has occasionally extended tax breaks for excise taxes paid on specific goods, particularly those that stimulate the economy or improve the environment.

As an example, the IRS offered a tax credit for taxpayers who paid excise taxes on biofuel during the years 2011 through 2013. Those who paid these taxes could claim a temporary tax credit and reduce their overall tax liability. The government may use these tax credits to encourage citizens to buy specific items or use selected services.

In short, an excise tax is an additional fee charged by a federal or state government on a specific good or service. They are intended to increase revenue, which is why they vary widely. In a few instances, though, you may be able to use your excise tax paid as a tax credit. Talk to an experienced tax preparer to find out if you qualify for any excise tax credits this year.