How does the bank/IRS know whether a bank transfer over k is a gift or loan repayment?
Suppose I want to help a relative, an international student, pay his college tuition before he arrives in the US (let's say the amount is k, i.e., over the k tax-exempt limit for gifts). He'll pay me back after arriving in the US and setting up his US bank account, with parents wiring in the money. I understand that even if my payment is treated as a gift, tuition is exempt from gift taxation as long as the payment goes directly to his college.
My question is what's the tax implication when he pays me back through bank transfer in the US. In principle, this is repaying a loan, rather than a gift to me, so there shouldn't be any tax. But how does the bank (or IRS) know whether it's a gift or loan repayment? Will the banks, either his or mine, care? Should he file any forms? Should I?
I guess a related question is how is one supposed to report/pay gift tax if it is involved. Is it all based on self-report on tax forms? Or will the bank notify the IRS and then you pay? I hope it's the former, so there is no problem---there is no need to report since it is a loan rather than gift. But if it's the latter, we will have to deal with the banks or IRS, which we'd rather not. We just don't want the trouble even though we can prove it's not a gift. I've done some research and understand this is not cash transaction so it should not trigger currency transaction reports.
Any finance professionals knowledgeable on this? Thanks in advance!
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You don't need to file or do anything.
The bank will report all transfers over 10 000, but chances are slim that it will even be looked at, if you don't do this every week. Worst case, someone will ask you about the source, and you tell them exactly what you wrote above (I had multiple international transfers over 60k and nobody ever asked).
You said you paid his tuition, and he is now paying you back, so in case someone asks, you should be able to produce the documentation on the tuition payment - a bill, or your bank statement showing you paid it; and the amount should be matching, so you have proof.
Note that if he pays you interest, it is taxable income. You are obligated to list it on your next tax filing.
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