Miguel Sanchez 0:00

Welcome to the First Gen One-on-one podcast. Today I am with Alex Embree. A first generation college graduate who leads a financial literacy program at the University of Missouri. In this episode, we'll hear about her journey as a first generation graduate, learn more about her work at the University of Missouri, and walk to some tax basics that are specially important for first generation students. Alex, thank you so much for being here today.

Alex Embree 0:31

Thanks, Miguel. I really appreciate your invitation to to teach folks about this really important topic.

Miguel Sanchez 0:37

Yes. And taxes, as all of us know, it's something we must do, and when we first connected a few months ago, I was beginning to plan season three of the podcast, and we're focusing on specific personal finance topics. For our first generation community, the work you do and the conversation we're having today is essential for the first gen community. And before we dive into that, tell us about your background.

Alex Embree 1:08

Yeah, you mentioned that. I am a first generation college graduate and I'm really proud of that fact. Proud of my parents and the experience that they had. But both of my parents worked in careers that they were trained to do a thing. My dad is an electrician and my mom was a dental assistant. And the expectation was always there that I go to college. But I didn't necessarily have a lot of guidance as to how do I choose a major, how do I choose a career? And I committed to a major in communication, which as is really broad. And doesn't. Prepare you for a specific career, which was what I saw. And during college I never would've expected that I would end up working in personal finance. I love math, but I loved working with people. More. And I thought communications was an opportunity to do that. But I graduated during the Great Recession, still with no idea what I wanted to do. Literally looked into nannying abroad and joining the military. And I was really fortunate that a friend who worked in the career center helped me create a resume and they introduced me to this college access program. Called the College Advising Corps. So I was part of the Missouri College Advising Corps, which was a program that placed recent grads in high schools with low college going rates largely free and reduced lunch. Lots of first gen students. And my job right out of college was working with first generation students to help them understand the college going process. I learned really quickly that if I was helping a student make decisions that were arguably very expensive, I needed to understand things like financial aid and that led me down a path of learning about my own personal finances which. Full circle moment over a decade later, when I got laid off from an advising job my division closed, this position opened, and that was back in 2021. And I knew I had a passion for working with college students. I knew I had to learn through lots of trial and error about personal finance and had an interest in it. And so as a condition of this job I was required to get. My accredited financial counselors designation, which is how we connected. And and I'm currently in the process of pursuing my graduate certificate for to become a certified financial planner, which was something that came into my head back in 2014 was the first time I started thinking about this as a potential path. Here I am. Definitely not where I thought I'd be, but I think all of those experiences have made have led to this point where I get to use that experience to help college students develop some really important skills that they're gonna take with them for the rest of their lives.

Miguel Sanchez 4:09

One of the reasons why we decided to be more specific with the episodes and have specific topics for our students is because. As we've had conversations with other first generation graduates, it's become obvious that choosing a school, whether it's undergrad or graduate school, it's a financial decision. It's not just about where you're going and why you're choosing a certain major. It's thinking about the tuition, the cost of living, the the career prospects of that education. And so it. Comes back to personal finance. I wanna start, and the heart of this episode is on taxes and we're not gonna be able to cover everything about taxes because. It's very complicated. And today's discussion on taxes is a broad overview of the concept and always consult a tax expert if you have additional tax questions. So let's dive into this topic. Let's start with we all know that we have to file our taxes and for most of us it's April 15th and there are exceptions there. But let's start with some definitions. So what is taxable income and how should first generations think about that?

Alex Embree 5:24

Yeah so I'm so glad that you mentioned seeking financial advice from tax professionals. That might be somebody like A-A-C-P-A, a certified public accountant. But yeah, taxable income is as the IRS defines it, income is basically anything derived from sources unless explicitly excluded, which I know is a lot of jargon. But the way that I wanted people to think about this is if we're, if we are receiving income for a job through even sources like our savings or investment accounts, or even from financial aid from some scholarships and grants might be taxable. We're receiving that income. We declare it with the IRS and then through. The kind of accounting methods of the IRS, they determine how much we owe in our in taxes. Taxable income is pretty much all of our income, but we can reduce our taxable income through things like deductions and credits, which I know we're gonna cover throughout the episode. I will just I think sometimes when I'm working with college students, there is a lot of confusion and it feels a little bit like this mysterious equation that comes to, do I get a refund or do I owe taxes during the year? So I just want to, provide a, like a simple outline of how taxes work that process. So generally, we earn income from these various sources. So those sources could be employment, they could be investments and savings accounts. They could be scholarship income. These are common sources. And then for some of those sources, taxes are taken out of our paycheck. So if we have an hourly or a salary job, we know that some of it goes to the IRS before it even hits our bank account for other types of income. Those taxes are not withheld automatically. So things like self-employment or gig economy kinds of work and things like our investments and our scholarships potentially. So in those cases. We aren't paying in advance before tax day, right? So some of our income might have tax withheld and some doesn't. So January through April is this time where we reconcile it and we say the government knows what we've earned, but we say, Hey, we've earned this amount of money. And the government says, okay, you've already paid this amount. Either you've overpaid or you've underpaid. And also there are these things called deductions and credits that we can claim that help us to reduce the taxes that we owe. And so that accounting period is taxed. Time. It's an exciting time in my office. We really nerd out on taxes and really try to teach the students that visit with us how taxes work because if we understand it, we can strategically and lawfully reduce the taxes that we pay or the timing of it. So we get to keep more money in our pocket for spending, saving and investing. So hopefully that kind of explains how we get from, we've earned it to. We owe or we don't owe.

Miguel Sanchez 8:36

I want to dive deeper is this concept of a refund. Because I remember when I was younger, I used to get very excited. I'm gonna get this refund and I'm gonna buy, or I'm gonna spend, or I'm gonna do whatever with it. Why do we call it a refund? Is it free money? How would you describe it?

Alex Embree 8:55

Ooh, okay. So I love this question because a lot of people have a similar experience that you have where you're like, yay, I got a refund, or, my refunds so big this year, and without really knowing where the refund comes from. Sometimes the refund is because we've overpaid our taxes. So when when we. First employed with A company, and we fill out this form called a W four. And on it we declare something that determines how much taxes get taken out. So we might say we have a family of one or two, and that then the employer uses to estimate how much they need to withhold from your taxes to pay in advance. And it's not always accurate because of things like deductions, which is a, an opportunity for us to reduce our taxable income. We can, I guess we'll talk about that in a little bit. Sure. And then credits, which is a dollar for dollar sort of gift card to pay our taxes. Sometimes refunds are re a result of us over declaring or the employer withholding too much, and in those cases, really our money is better served in our pocket during the year than it is being refunded to us in a lump sum. Because if it's in our pocket, maybe we can use it to pay down debt. Maybe we can save or invest it and earn interest on it. Versus waiting until it comes and saying, woo hoo, extra money, I'm gonna buy a new tv. So in those cases an ideal situation is that we, I say an ideal situation is I owe$10. Something I can pay, I underpaid by$10. And that means I've kept more of my money during the year to, to use in more thoughtful ways or to enjoy it. So that's how I want people to think of it is sometimes it's okay if we get a refund, it's a neutral sort of thing. Maybe it means we capitalized on an opportunity for a credit but maybe it means we overpaid. And so in that case, we would want to keep that money during the year.

Miguel Sanchez 11:11

you mentioned deductions and credits a few times. I get them wrong all the time. What are deductions, what are credits? And maybe just give us one or two examples.

Alex Embree 11:21

Yeah, deductions and credits, So they're commonly confused. Things, so I want you to think about this like a grocery store analogy. So a deduction is like a coupon, a deduction reduces our taxable income. So what that means is that amount of income, whatever the value of the deduction is, that amount of our income is not taxed. The most common is what's called the standard deduction. And for this coming year, for this year, 2025, the standard deduction is going to be$15,750 for a single person. So lots of college students. So the first$15,750 that we earn, there is no tax on that income. Okay. Another common one for college students, and especially college graduates, is student loan interest deduction. So up to$2,500 of the interest that we pay for our student loans, we can claim that and that amount of our income is not taxed. So they're valuable because let's say we're in the 10% tax bracket. If I'm claiming a$2,500 student loan interest deduction, I'm basically saving about$250 in taxes. So whatever our tax bracket is, you can think of it that way in a really simplistic way. Credits on the other hand, we can think about credits like a like a gift card. So we've received our bill and then the credit is used to pay that bill. And credits can be either refundable to us or non-refundable. What that means is if during all the calculation let's say I owe$3,000 in taxes for the year, and I have paid$2,500 in taxes through my paycheck, withholdings. I may owe the federal government IRS$500. That's my unpaid tax bill. So that's the bill we get when we file our taxes. Now, let's say I can use a credit, so maybe I can use common one for college students is the American Opportunity Tax Credits, an education tax credit. It's worth up to$2,500. I can use that credit and it's a dollar for dollar gift card to pay that tax bill. If it's refundable, it can take it to zero. My tax bill goes from 500 to zero, and then part of it gets refunded to me. So if I have extra credit in the case of the A OTC, American Opportunity Tax Credit up to a thousand dollars is refundable. So it pays up$500 and then I have a portion of the credit could be refunded back to me. Now during the year, let's say, I paid exactly the amount of credit that, or amount of tax I owed. Okay? So I owed 3000. I paid 3000. I have no tax bill, but I have a refundable American opportunity tax credit. So in that case, since I paid that credit, takes my tax bill down by about$2,500 and I get that money back and that's a big refund. So we think about it like that, coupons versus gift cards.

Miguel Sanchez 14:46

It's wonderful. I could have not put it any better way. When I think about deductions in credits, I always have to go back. Online or look at my notes for, from when I was studying for the a FC and remind myself. But this idea of think of deduction as a coupon and think of a credit as a gift card, I think it can't get any simpler than that. Great. You mentioned the American Opportunity tax credit and you mentioned its impact on credits, but can you expand on that? What is the American Opportunity Tax credit?

Alex Embree 15:21

Yeah, so the simplest way to explain education tax credits is they are an opportunity for the they're meant to incentivize people to pursue postgraduate education. Or college education or coursework to advance their careers even if it's not leading to a college credential. So there's two types of education tax credits. The American Opportunity Tax Credit is generally used by undergrad students or their parents. And that credit is worth up to$2,500. And basically, if a person has. About$4,000 or$4,000 is the maximum amount of what are called qualifying educational expenses. And the IRS defines this as tuition fees and required books and supplies. So if we have$4,000 of out of pocket tuition fees and required books and supplies, we can. Tell the IRS, we have that and say, I'd like to claim the American Opportunity tax credit and they'll give us a hundred percent of our first$2,000 of expenses as a credit, and then 25% of the next$2,000 of expenses. So it's valued at up to$2,500. So that's one. Now that has to be for the first four years of education and there are some eligibility requirements, but either the student, if their parents are not claiming them, or the parent can claim this so the student can claim it if their parents are not claiming them or the parent can claim it. The other education tax credit is called. Excuse me, the lifetime learning credit, and this doesn't have to be in pursuit of a degree. It could be for one or two courses at a qualifying institution. And it's a lower dollar value. And I don't have all of the numbers in front of me or at this moment, but, but pretty much anybody can claim that. So graduate students are usually who claims that one. Or I'm taking classes right now and I can claim it for the classes that I'm taking, even though I'm not getting a degree for the classes that I'm taking.

Miguel Sanchez 17:39

how do you explain that to students? Is it that their parents are having trouble with this? Are the students having trouble? How should they be working with their parents with this?

Alex Embree 17:51

Sure. For college students in particular, there's a lot of confusion around dependency because we have to think about dependency for financial aid and for fafsa. And then we think about dependency for tax. Yep. And even though we use the same language, they're defined completely different because FAFSA dependency is defined by federal student aid and tax defendant dependency is defined by the IRS. In the case of fafsa most college students are going to be required to use parental information, even if they are financially independent. There's a list of criteria that can deem a student independent for FAFSA and for financial aid, but it's pretty narrow. So it's things like marriage. If the student has their own dependent, like they have a child or they're caring for family member and can claim that person as a dependent on their tax returns. Veteran status, that sort of thing. Homelessness or risk of homelessness. Or in cases where there might be estrangement from parents or abuse and the student can't access that information. So very narrow definition with. Tax dependency. If a parent provides more than half of the financial support, they can claim their student as a dependent. If the student provides more than half of their own financial support, they claim themselves, so to speak, the parent can't really claim them technically. So if a student is completely financially independent, their parent's not gonna claim them on their taxes. More than likely. But that student may still have to use their parents' information on the fafsa. So they are just two totally different things.

Miguel Sanchez 19:40

So we covered taxes, some definitions. We talked about the different concepts that you should be thinking about. You can rewind this episode and listen again to the great advice that we've heard so far. Again, just going back to, deductions as coupons and tax credits as gift cards. To me, that was today's big win. Just having that definition clearly explain has been a great help. Now with investing, we, we say that if you do it early, it's always great because you get to reap the benefits of interest, on compounding interest. And sometimes people in general shy away from investing because. We, think that we must invest in the market. We must buy securities or bonds, all these complex instruments, at least for me. When should students start thinking about investing?

Alex Embree 20:40

I. I think it's so important to start with this question because what I have noticed in the last, in my time here in the Office for Financial Success is that young people especially feel a lot of pressure to start investing. They hear this idea that you should invest as early as possible. There's information at your fingertips on TikTok and on Instagram and on YouTube about investing and why you should. But it often, it, a soundbite can't capture the nuance of when so as early as possible, yes, is one principle, but it leaves out the dot. Yeah, and the dot, dot.is, but not before establishing your financial security foundation. And that's so important for college students especially, but really anybody, because if we are beginning to invest, but we maybe have high interest debt, we can't outpace that interest by investing, so we have to take care of that. Financial security foundation before we start investing, or if we don't have adequate savings in just a high yield savings account and we have a deductible for our car insurance, we have to pay if we don't have save a savings account and we have to pull our investments. We've now just eliminated that long-term growth potential. Maybe we owe taxes on that because we've only had it for nine months instead of a year, and we're paying income taxes on it.'cause there's different tax rates for investment. So the financial security foundation has to be established first. So what we recommend is. Having adequate emergency savings, a starter fund being 500 to a thousand dollars or maybe think about what's my deductible for my insurance? And that's a starter fund because that's a pretty common financial emergency. So that could be a starter fund. And then we keep contributing to that until it gets to our fully funded three to six months. As we're in our early adulthood. The second is. This one I don't see a lot in recommendations online, but it's something that I stress is having a savings plan for non monthly, but expected expenses. So these are things for college students. I've got dues, so it's gonna be a big expense that comes up. I know it's coming, it's going to eat into my monthly income if I'm not prepared for it. Or I can save a little bit every month and have that ready. The third is adequate insurance. If we don't have car insurance, we should not be investing. So are we adequately insured? And then the last is regarding debt. So if we have high interest debt, I typically say anything over about 7%. We want to try to pay down before we start investing or if we need student loans. And the loans we're going to take out are greater than 7% interest. I am at a. Better financial mathematical position by not taking those loans and paying that off with my wages versus investing. Now certainly sometimes investments grow at faster pace. But generally those are the principles. Your financial security foundation is liquid savings, adequate insurance, and no high interest debt.

Miguel Sanchez 24:08

I like that you suggested having at least a deductible for insurance saved up. And I'm, as you were saying, that it reminded me of when I was like 22, 23 and I had a minor car accident, and at the time I think it was like$500 and I had to use my credit card because I didn't have that cash saved and then I had to pay interest on that. But even just having that amount saved for an unexpected circumstance is definitely wise related to tax. How would you describe tax deferred versus taxable investment accounts?

Alex Embree 24:46

Yeah so this is another thing that, we have so much information and what's really easy to open are these taxable investment accounts. For example, my bank account has a, an, I can easily buy and sell index funds and stocks and bonds on my bank account now. So a tax deferred account or I want to think a bit more broadly, like a tax advantaged account are accounts that allow us to invest Umhmm. Either tax for your tax deferred, depending on what type of account and when that those investments grow over time. And when we take them out, maybe we're paying the taxes when we take them out and maybe they're tax free when we take them out. But there are restrictions to when we can access them. So generally these are going to be things that have a specific purpose, like a education savings account called a 5 29 plan or a health savings account. They have a specific purpose. We can use them for medical expenses or educational expenses. And we. Don't pay taxes on the growth if they're used for those purposes, or the big ones are retirement accounts. If I contribute to a, my employer's account, these are the ones that typically start with a four, 401k, 4 0 3 B, 4 57. Those are employer accounts. If I contribute to those I can buy and sell within those accounts, and I'm not being, I'm not paying taxes on my earnings until I take them out in retirement. Or in the case of a Roth account, I'm not paying taxes when I take it out. I pay taxes before the money goes into the account. An IRA is an individual retirement account, so it's not housed with an employer. So anybody can open an IRA. So to summarize that tax advantaged accounts allow us to invest and allow our money to grow without it being taxed every time we make a transaction. It's generally taxed, if at all. Either right when we put it in or right when we take it out. And so the hs the reason I say if at all is because an account like an HSA Health Savings account we get a tax deduction when we put money in. It can grow over time. If we use it for medical expenses, it's not taxed when we take it out. So our growth is untaxed. Wildly tax advantaged account. IE encourage everybody to learn about health savings accounts.

Miguel Sanchez 27:27

Before, before we go out, I wanna mention, yeah. One very quick thing about the different accounts is for those of you listening, you might be thinking, when do I need an HSA? When do I need a 5 29? When do I need, there are different, all these different types. Before we go on, I just wanna say that a lot of these accounts or type of accounts or instruments, so to speak, will vary depending on your stage of life. I'm just gonna give you a very quick example. I didn, and sometimes it just, thinking critically, one of the biggest mistakes I made. Was to open my retirement account 10 years after I was employed. Huge mistake, in my opinion. Huge mistake. So really be intentional about saving, even though you might say to yourself, oh, this is not, I won't need this money, in 40, 60 years. So why do it? Or you really won't think about the future so much. Before we go on, I just wanna stress some of these you should do right away when you are employed, in my opinion. Doesn't mean that you need to have the all at once, but really know what's available. So when that moment is for you, what to look for. So I just wanted to also mention that.

Alex Embree 28:46

Yeah, that's such a great point. Yeah, so you generally accepted advice from financial professionals is to start with a retirement account. That's an account everybody should have as, as early as possible, but again, not so early that we don't have our financial security foundation in place. And I just, I also just wanna stress I hear from students a lot whenever I tell them. It's okay if you're not investing during college. It's okay if you need to work to pay down that bill and you wait until you have your full-time job. And so many of them will come up to me after presentations and they'll say, thank you for saying that, because I felt this pressure that I needed to start and I was behind. And so I just wanna emphasize, you are not behind. If you're in college and you're not investing, just full stop. Just full stop. That said, I did pull I'm a numbers nerd, probably you are too. And so I did a little example for why investing early is so important. So we're gonna use age 22, right? Because we don't have to invest when we're 20. We're gonna use age 22. Common age when people graduate from college, if a person invested.$325 a month from 22 to 65, they would have about a million dollars in their retirement account, okay? If that same person waited until they were 32 in order to have a million dollars, right? We have to invest$675, and I'm assuming 7% growth here. So that's just my assumptions. So$675 over twice as much. If we wait 10 years, if we wait till we're 42, we have to invest over$1,500 per month to reach a million dollars in retirement. So I like to say it's time not wealth or time not income. That equals wealth because if we do start young, even with a little bit. 32, 320$5 a month is we'd have to probably tighten our pocketbooks a little bit whenever we're right out of college, but it's not so much that it's unattainable. When we get to that 6 75 or we get to that 1500, that becomes much more difficult to pull out of our family budget. So starting early gives you flexibility. Long and short of that.

Miguel Sanchez 31:08

That's great. Alex, what are some trusted resources students should consider to learn more?

Alex Embree 31:15

Sure. The first that I'll mention, I know is gonna be intimidating, but the IRS website they I've noticed over the last couple of years that a lot of the pages, they have tried to make it a little bit more consumer friendly language. Going and learning about the education credit. Definitely using the withholding calculator. That it's in, August, September, or so every year. Go in, put in the information, what you've earned, what you've paid, and then find out am I going to overpay or underpay in my taxes so you're not left with a surprise. The IRS runs a program called vita, volunteer Income Tax Assistance, and these programs are all over the country. It's free tax prep. Many universities or not many, some universities offer these programs, but a lot of times libraries or local community foundations will run these VITA clinics and people can go get their taxes prepared for free. And I like to tell students to take those opportunities to learn about taxes, ask questions, don't just sit and passively let somebody do your taxes, but really learn about what they're doing. Second would be even if a, if you have taken a personal finance class in high school, many states require these. I they're effective, but we're not practicing when we're learning in high school, we're not practicing all of the different. Puzzle pieces of personal finance when we take those classes. So if your college or university offers a personal finance class, it's well worth it. To see if it fits in your academic plan or to use it as an elective, or, honestly, if I could go back, I didn't take one at all, I would pay, I would gladly pay$2,000 for a personal finance class because I know it's going to, it's the return on investment that is far greater than any other class that a student can take in college. I say that understanding the value of a college degree and all of that, but literal return on investment. Or seeking financial wellness services like ours. The Consumer Financial Protection Bureau, CFPB has some really great consumer resources or little handouts and checklists and things that people can use to to learn about their personal finances. And investor.gov also has some good consumer resources. So these are reputable sources. If we're going out to, they're not that interesting, I'm gonna be honest. They're not that interesting. There's not gonna have that social media presence that is really quippy sound bites and that sort of thing. So if you're going to social media, there's great influencers, if you will, and financial experts on social media, podcasts, YouTube, et cetera. But check their credentials. Find out how they, how they are prepared to give you the advice or the education that they're providing to you. Are, do they have a, an a FC accredited financial counselor designation? Are they a certified financial planner or an accountant or a lawyer? What are their credentials? What makes them the expert in that area? And seek in information from multiple sources. So if you hear something from one place, validate it by trying to find four or five other sources that are going to give you the same information. So that's how I recommend approaching finding resources outside of those kind of government nonprofit entities.

Miguel Sanchez 34:52

You gave us a lot to think about I wanna end, this is a question that I ask everyone on the podcast. What has been your biggest achievement as a first generation graduate?

Alex Embree 35:03

Oh, goodness. That's honestly, it's a hard question. I think, you know what? No, it's not. I feel that I have landed in a profession that feels right. It feels like I'm not searching for where I ought to be. And from my experience, and I know for many first gen students, sometimes it can feel a little bumping into career paths and, we don't get to try'em on during college a lot of times and we don't have a lot of guidance necessarily about different types of work. And finding mentors that helped me to land where I landed. Ha has been my biggest accomplishment. And I can give back to my family too by doing that.

Miguel Sanchez 35:51

Thank you Alex. I'm sure there are many students who in the future and even now are recognizing that you've mentored them. So I'm sure that is going full circle. Alex, thank you for being here today.

Alex Embree 36:03

Thank you so much, Miguel. I've enjoyed this conversation.