Do I Have To Pay Tax For Money From Overseas To Pay Off My Debt?

Question

I have a large amount of debt with high interests. One of my relatives in overseas suggested that he will pay off my debt and I can pay him with monthly payment without interests. But wiring that amount of money (said 30,000) will be reported to the IRS by the receiving bank. Will I have to file in my imcome tax that I received such an amount of money and owe taxes to IRS (which by that time, all the money is being used to pay off my debt). All suggestions and answers are welcome.

Answer 1

No, you will not owe a tax due to receiving this money.  However, your relative might, if your relative is subject to the same tax laws.  Also, if you are obligated to pay back your relative and fail to do so, then you will owe tax on the amount that you fail to pay back.

If the money is a gift: Gifts from relatives are not subject to income tax in the U.S.  However, if your relative is a U.S. citizen or is in a country with tax laws similar to the U.S., then your relative will owe gift tax.

If the money is a loan: There is no tax due when one receives a loan.  However, if one does not pay back the loan, then one owes tax on the forgiven or canceled debt.  In any case, a relative who loans money without interest or at a lower interest rate than a bank would charge must pay tax on the interest that would have been received if the relative had charged interest at market rates.  However, this tax is owed by the lender, not the borrower, so it only applies if your relative is a U.S. citizen or is in a country with tax laws similar to the U.S.

Answer 2

No, it's a loan, you won't have a problem.  It's possible that you might be asked to explain what it's for, but that shouldn't be any problem.

Even if were a gift, you are the recipient, so you wouldn't owe gift tax on it.  

No, you don't show it on your income tax or owe tax on it.

Answer 3

You may get hit with gift taxes.  You need to have a written agreement in place with your relative setting forth the terms of the loan and signed by you.  You also need to keep proof of your monthly payments to him.

Answer 4

That is actually a smart tax loop hole if they are not citizens of this country, as if they were they should of paid a gift tax, I going to forward this question and my response to the IRS because I think it is quite brilliant and want to see what they say about it.

Answer 5

you dont have to pay taxes on the loan.  the bank will, of course, keep records of the transaction, but will not necesaril report to the irs.

if you do get called by the irs, then just show them that you borrowed it to pay a higher interest rate loan. and all will be ok.