How was it decided which of the KIAs were returned to the U.S. for burial, and which were buried overseas?
They were not returned to the U.S. until after the war ended, and that was a decision left to the families. When a soldier died they were buried in the closest war cemetery rather than immediately shipped home for burial. Following the war the fallen soldier could be left in the war cemetery (of which there were many, usually formed near field hospitals or similar places well behind the front lines that were considered safe from enemy engagement) or they could be repatriated back to the U.S. for reburial. The families made that decision.
This.
Basically as US forces moved through Europe and the Pacific, they established temporary cemeteries in the areas they were fighting in.
After the war, the next of kin was given the option of leaving their dead relative buried in Europe, or sent back home for reburial in the US. This mirrored the US WWI experience, down to a very similar percentage of returns vs. reburials in Europe (about 60/40 IIRC).
They were all disinterred and put in caskets, and some were sent home, and the rest were consolidated into the temporary cemeteries that had been subsequently designated as permanent ones- usually for proximity to notable battlefields (Normandy, Ardennes, etc…) or because of notable natural beauty.
Also, as I remember hearing from relatives, there were monetary costs involved in having the body disinterred and shipped home.
For at least some poor families, that may have entered into their decision.
During the war, those bodies that could be recovered were buried in small nearby temporary military cemeteries. Right after the war they were disinterred and consolidated in several much larger overseas cemeteries. Then from around 1947-1950 the next of kin were given the option of having their relative remain in the large overseas US Military cemeteries, moved to one inside the continental US, or returned to the family for burial in the home town cemetery or cremated and returned to the family.
Not so. All of the expenses were covered by the military with the exception of the cost of the actual burial plot (if the deceased was buried in their hometown cemetery rather than a military cemetery) and the cost of the headstone if the family chose to get one. They could choose to have the military provide a flat stone or bronze plaque at no cost.
If the family incurred any expenses from the local funeral home for handling the deceased, they could request a reimbursement from the military.
Reading through “Disposition of World War II Armed Forces Dead” (a pamphlet that was provided to the next of kin) provides some more info.
The military covered all expenses if the deceased was buried in a military cemetery or was cremated. If the next of kin chose to bury the deceased in a non-military cemetery the military would take care of transportation to the home town (usually by train, accompanied by a military escort). The next of kin could request the escort to remain (up to 72 hours) for the burial. The next of kin would have to make arrangements from there to the cemetery. This would be handled by a local funeral home. They could request reimbursement form the military for money to defray the actual burial expenses, up to $75 (which I guess went farther in 1950 than it would today 
).
Local veterans organizations would organize the burial services at the next of kin’s request, provide an honor guard, etc.
Here’s the text of the official pamphlet for families of WW2 war dead:
Tell Me About My Boy… | Army Quartermaster Foundation, Inc
The only actual cost was if reinterment in a private cemetery exceeded $50, at which point the family was on the hook.
In a bit of a weird coincidence, the repatriation of remains actually began 75 years ago this past Monday (5/30).
Repatriation of World War II soldiers’ bodies began 75 years ago - The Washington Post
And here’s a link to the government agency that manages/maintains the overseas war cemeteries.