Case 2: First Year on the Job Joe finally received that job offer in the mail. He

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Case 2: First Year on the Job

Joe finally received that job offer in the mail. He worked part-time for First Cirrus Bank during the spring semester and the work experience had paid off. Beginning on July 1, he would become the newest loan officer for Harris Bank and Trust in Chicago. He was sure it was only a matter of time before he would be its newest Vice-President of Finance.

His grandparents flew in from Virginia for the May graduation and gave him $1,000 as a graduation gift. The post-graduation parties were great; they gave him a chance to update his organizer with jobs and addresses for the friends he made at school. He was sure they could all help each other in the future. After saying goodbye, he took a last look at his old alma mater and headed for the interstate.

June was the month to get organized. He needed more suits, shirts, and ties. He borrowed $2,000 from Harris Bank. Joe told the loan officer he was beginning work on July 1 and asked lots of questions while the loan officer filled out his paperwork. His conversation reaffirmed his positive feeling about working at Harris.

Next, he found an apartment. He decided to live alone and signed a one-year lease, paying a $200 security deposit and $500 for July plus $500 for next June.

Unfortunately for Joe, his favorite Aunt Middy passed away on July 3. She was very fond of Joe and left him $14,000 as an inheritance.

In the month of June, Joe incurred expenses for groceries, laundry, L-train tokens, and health club membership fees.

For the first six months, Joe was assigned to several of the bank's departments. Harris’ policy was that a good loan officer knows something about all the bank functions. He was a teller for several weeks and gained a general introduction to bank operations. Most of his time was spent meeting businessmen and women who wanted to apply for loans. His job was to help them complete their application, construct their financial statements, and review their overall business plan. It was interesting to work; he learned a lot about different businesses and often became an advocate for these people in his report to the Loan Committee (which was responsible for the final decision). He had helped a number of people and continually monitored their payments and progress. One of the groups he worked with owned the recipe for the hot sauce he liked -- they wanted to open a business south of Chicago.

All in all, it was a good year. Joe was very pleased when he received a Christmas turkey as a form of bonus for his hard work at Harris Bank and Trust. The turkey had a fair market value of $20. He received his W-2s for the year in January and was shocked to see how much the Federal and state government had taken out for income, social security, and Medicare taxes. He was determined to pay closer attention to nightly news broadcasts that covered tax issues and to follow government spending more closely.

"Well," he thought, "maybe I can get a refund. I spent a lot of money this year and I know some of these items must be deductible." Riley set to work chronologically examining his checkbook for the year. He categorized his expenditures for the year in the following manner:

Utilities (University Apts $480, Chicago $550)
Rent (University Apts $600, Chicago $3,700)
Groceries $2,000
Harris Bank Loan (Principal $450, Interest $545)
Clothes $1,200
Laundry $160
Entertainment-personal $1300
Lunches Purchased at Work $625
Train Tokens $500
Tuition (Spring Semester) $7500
Books (Spring Semester) $200
Credit Card-Late Payment Finance Charge $15
Church $480
Health Club Fees $400 (6 months)

In addition, Joe received Form 1099s showing that he had an interest income of $160. He wondered if he would ever have enough money to buy a car.

Joe’s W-2 from First Cirrus Bank showed wages of $2800 and FIT withholding of $336. Joe’s W-2 from Harris Bank & Trust showed wages of $16,750 and FIT withholding of $2568.

Tax Compliance Assignment

1. Compute Joe's Federal income tax payable/refund for the year. Assume that he does not want to contribute to the Presidential Election Campaign Fund.

Research Assignment

2. What are the tax consequences of Joe receiving an inheritance from his aunt?
3. Is Joe required to include the fair market value of the $20 turkey in income? Explain.
4. How should the landlord of Joe’s apartment in Chicago report the rental income of $1,200 received from Joe? How does the landlord treat the $200 security deposit? Consider how your answer would differ depending on whether the landlord reports income under the accrual or cash-basis method.