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yshpakov
New Member

Is it my taxable income if my debtor repays the debt to me?

First I paid for his utilities with my credit card. Then he transferred money (repaid his debt) from his checking acc to my checking acc. The extra problem is that there is no name of my friend in my credit card statement (in the purchase transaction details) but there is the name of my friend in my checking account statement in details of this transaction.

So how could I prove to IRS the link between these 2 transactions? And should I prove? Maybe IRS must trust me unless the prove I lie? So who should prove: me or IRS?

P.S.

I'm a resident of VA. So the same question is for the state level please

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Is it my taxable income if my debtor repays the debt to me?

Once you have paid tax on your income and are dealing with after-tax dollars, you are free to gift it or lend it or do anything else with it.

If you spend money in order to generate more taxable income for yourself, those expenses are usually deductible, subject to various rules.

If you loan money (to anyone) and receive interest income (get paid back more than you loaned) then the interest is new taxable income.  The principle is just the return of money that was already taxed.  

If you loan money and then get paid back without interest, there is no taxable or deductible event going on.

If you make a personal loan and never get paid back, so that you have a loss of money that you already paid tax on, you may have a bad debt deduction, but this is complicated.  

Cash transactions more than $10,000 are automatically reported to the IRS to help them track money laundering and other financial crimes.  If you structure a large cash deal into a series of transactions less than $10,000 to avoid the reporting requirement, that constitutes a new crime called "structuring" and your assets can be subject to seizure.

Your assets can also be subject to seizure if you are alleged to be involved in helping someone else disguise the illegal source of their income, even if your own actions would not be illegal but for the involvement of another person. For example, if you buy supplies for your contractor friend because he is low on money or has bad credit, and he pays you back when he finishes the job, there are no taxable or legal consequences.  But if you buy hydroponics equipment and grow lights for your friend and he pays you back with money from selling pot (because he wants to hide the fact that he has a grow operation and doesn't want to pay cash to the hydroponics store or deposit the cash to his bank account), then you can be subject to legal action even though the separate parts of the transaction (buying grow lights and loaning money to a friend) are both legal on their own.

Hope that helps.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*

View solution in original post

18 Replies
Carl
Level 15

Is it my taxable income if my debtor repays the debt to me?

Did you deduct what "you" paid from your taxable income? If yes, then what you were reimbursed is reportable taxable income. If no, then do nothing.

Is it my taxable income if my debtor repays the debt to me?

I don't understand...you paid someone's bill, and they paid you back...there's no income or deductions involved in that transaction...why would you need to prove anything to anyone?
♪♫•*¨*•.¸¸♥Lisa♥ ¸¸.•*¨*•♫♪
Carl
Level 15

Is it my taxable income if my debtor repays the debt to me?

Lisa, as an example, if it's rental property, then "all" income received in that capacity is reported as rental income. So if the rent is say, $1000/mo and includes an allowance of say, $200/mo for utilities paid by the landlord, if the renter pays the landlord for excess utility use, the landlord counts that excess as part of the rent received, and it's taxable.
Then the landlord could claim the total amount paid for utilities, as a tax deductible rental expense. That's but one possible scenario where this stuff comes into play.

Is it my taxable income if my debtor repays the debt to me?

Nothing was mentioned about rentals.  And he is using the Free Edition.  I agree with Lisa, why do you need to prove anything?  Doesn't sound like anything that needs to go on a tax return.    We  would need to know more details about it..
yshpakov
New Member

Is it my taxable income if my debtor repays the debt to me?

Thank you for your responses.
Let me give you an example. Imagine I'm a bad guy. Imagine I made some work or service to someone and he paid me $1000 for my service via checking-to-checking transfer. Then I bought something on Amazon online for the same $1000 using my credit card. After that I can say to IRS that I bought this thing on Amazon for that person (not for myself) and the person just reimbursed my expenses. So it's potentially a way how to avoid paying taxes. So should I prove to IRS that I'm not a tricky guy? In case of random audit they would see some transfer from someone to my checking account and it would not be clear the nature of this transfer.

So in this situation (of audit) IRS would need to prove that I'm a liar or I would need to prove that I'm honest? At least could they require some explanations from me in writing about the nature of this money I received?

So how would they separate good guys from bad guys?

P.S. to the 1st Carl's message. I'm not planning to fill up the amount that I paid with my credit card into any IRS form (so obviously I'm not going to ask for tax deduction) -- if I understood you correctly
yshpakov
New Member

Is it my taxable income if my debtor repays the debt to me?

And for more details, I helped them several times. I paid utilities bills, purchased things on Amazon and some show tickets -- totally maybe $2-3K. And later this person returned me my money (checking acc to checking acc transfer).
Carl
Level 15

Is it my taxable income if my debtor repays the debt to me?

If I loan you $10,000 for any period of time, (days, weeks, decades, it doesn't matter) I do not report that loan to the IRS or state taxing authorities for any reason. There is no reason to. Therefore, I the lender (not you) pay taxes on that money. It's my money, not your's, so you don't report it to any taxing authority either.
When you pay me back, you are paying me *MY* money that I already paid taxes on. I have no taxable income to report. You are paying me money that was never yours, and *YOU* never paid taxes on. So *YOU* have nothing to claim or report either.
yshpakov
New Member

Is it my taxable income if my debtor repays the debt to me?

Hi Carl,
Thank you for your response.
So the bottom line. In case of IRS audit they could wonder the nature of the money that people transferred to me. They could request the explanation. I would present them 1) my credit card statement, 2) my checking account statement, 3) as well as my explanation that this money was just reimbursement of my expenses helping to my friends.

(Once again, it's totally not clear out of my credit card statement *WHO BENEFITED FROM THESE PURCHASES* -- me or 3rd party. And I guess this is the biggest potential problem.)

And they MUST believe me and my explanations (unless they prove that I've lied) that I made these purchases for someone else (not for me).
Is this correct?
Is this how it normally works here in the USA?

So this is not a theoretical tax law question, it's more about how it would work in practice -- how IRS employees would treat this situation and how they would consider it. Because you know sometimes your fair behavior could look suspicious as well as your unlawful behavior could look lawful.

Thank you
Carl
Level 15

Is it my taxable income if my debtor repays the debt to me?

You're making mountains out of molehills. Don't worry about it. I seriously doubt anyone at the IRS is scrutinizing your return, of the over 300,000,000 million returns they receive each year. More than 90% of those filed returns are never seen by human eyes. The 10% that are, are those kicked out by the computers.
Even the returns that are printed and mailed get scanned into their computers. Rarely does a human actually read one and scrutinize it.
They have a system that will radnomly kick out returns based on programmed criteria for human review, as a rough "checks and balances" thingy, and that's it. One year, they paid attention to charitable donations. Another year, they paid attention to home energy credits. So your chances of being targeted are about the same as mine are - which is nil.

Is it my taxable income if my debtor repays the debt to me?

@yshpakov The fact that you are so worried about this leads me to believe that something else is going on, and that maybe you should not even do this.
yshpakov
New Member

Is it my taxable income if my debtor repays the debt to me?

SweetieJane, I'm not worrying, I'm just trying to figure out how it typically works and what is potentially dangerous to me and what is safe. Trying to see if I should change something before the year is over or I'm just fine as I am. I'm a foreigner and not aware a lot about things. So it's better to double check in situations like this.
And guys thank you especially Carl!

Is it my taxable income if my debtor repays the debt to me?

You're allowed to pay for others peoples things and they pay you back...IRS doesn't care about, or have knowledge of things like that.    I have a friend that doesn't have checking account, I've written checks and paid for her stuff and she's paid me back in cash.   I'm sure it happens quite often with many people.
♪♫•*¨*•.¸¸♥Lisa♥ ¸¸.•*¨*•♫♪

Is it my taxable income if my debtor repays the debt to me?

Once you have paid tax on your income and are dealing with after-tax dollars, you are free to gift it or lend it or do anything else with it.

If you spend money in order to generate more taxable income for yourself, those expenses are usually deductible, subject to various rules.

If you loan money (to anyone) and receive interest income (get paid back more than you loaned) then the interest is new taxable income.  The principle is just the return of money that was already taxed.  

If you loan money and then get paid back without interest, there is no taxable or deductible event going on.

If you make a personal loan and never get paid back, so that you have a loss of money that you already paid tax on, you may have a bad debt deduction, but this is complicated.  

Cash transactions more than $10,000 are automatically reported to the IRS to help them track money laundering and other financial crimes.  If you structure a large cash deal into a series of transactions less than $10,000 to avoid the reporting requirement, that constitutes a new crime called "structuring" and your assets can be subject to seizure.

Your assets can also be subject to seizure if you are alleged to be involved in helping someone else disguise the illegal source of their income, even if your own actions would not be illegal but for the involvement of another person. For example, if you buy supplies for your contractor friend because he is low on money or has bad credit, and he pays you back when he finishes the job, there are no taxable or legal consequences.  But if you buy hydroponics equipment and grow lights for your friend and he pays you back with money from selling pot (because he wants to hide the fact that he has a grow operation and doesn't want to pay cash to the hydroponics store or deposit the cash to his bank account), then you can be subject to legal action even though the separate parts of the transaction (buying grow lights and loaning money to a friend) are both legal on their own.

Hope that helps.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*

Is it my taxable income if my debtor repays the debt to me?

If you are making a bonafide loan, have your friend sign a loan agreement.
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