Topics
— Tax Year 2006
Tax
Year 2006
State
and Local General Sales Taxes
The
Tax Relief and Health Care Act of 2006 extended
the election to deduct state and local general
sales taxes through 2007. The act was enacted
after Schedule A (Form 1040), Itemized
Deductions, and its instructions were printed.
Because we were not able to include the
instructions for figuring the deduction in the
Schedule A instructions, we developed Publication
600 to help you figure the deduction for
2006.
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Earned
Income for Additional Child Tax Credit
For
2006, the minimum earned income amount used to
figure the additional child tax credit has
increased to $11,300.
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Alternative
Minimum Tax
The
following changes to the AMT went into effect
for 2006. For more information, see Form
6251, Alternative Minimum Tax – Individuals,
and its instructions.
AMT
exemption amount increased. The AMT
exemption amount has increased to $42,500
($62,550 if married filing jointly or qualifying
widow(er); $31,275 if married filing
separately).
Exemption
amount for a child. The minimum
exemption amount for a child under age 18 has
increased to $6,050. (Before 2006, the limit
applied to a child under age 14.)
Foreign
Earned Income Tax Worksheet. Taxpayers
claiming the foreign earned income exclusion or
the housing exclusion must determine the tax on
their nonexcluded income using the tax rates
that would have applied had they not claimed the
exclusion(s). If you filed Form 2555 or 2555-EZ,
you must use the Foreign Earned Income Tax
Worksheet in the Form 6251 instructions to
figure the amount to enter on Form 6251, line
31.
Qualified
cellulosic biomass ethanol plant property. No
AMT adjustment is required for depreciation of
qualified cellulosic biomass ethanol plant
property that is eligible for the special
depreciation allowance under section 168(l).
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Alternative
Motor Vehicle Credit
You
may be able to claim this credit if you place an
alternative motor vehicle in service for
business or personal use after 2005. An
alternative motor vehicle must meet certain
requirements and be a new:
-
Advanced
lean burn technology vehicle,
-
Qualified
alternative fuel vehicle,
-
Qualified
fuel cell vehicle, or
-
Qualified
hybrid vehicle.
For
more information, see Form
8910, Alternative Motor Vehicle Credit.
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Archer
MSA Limits Increased
For
Archer MSA purposes for 2006, the minimum annual
deductible of a high deductible health plan
increased to $1,800 ($3,650 for family
coverage). The maximum annual deductible of a
high deductible health plan increased to $2,700
($5,450 for family coverage). The maximum
out-of-pocket expenses limit increased to $3,650
($6,650 for family coverage).
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Restrictions
on Charitable Contributions
Cash
contributions. All cash
contributions made in tax years beginning after
August 17, 2006, to any qualified charity must
be supported by a dated bank record or a dated
receipt. The tax year for most individual
taxpayers begins on January 1.
Clothing
and household items. Beginning
with contributions made after August 17, 2006,
no deduction is allowed for most contributions
of clothing and household items unless the
donated property is in good used condition or
better.
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Direct
Deposit of Refund
If
you choose to receive your refund by direct
deposit, you can now have your refund split
among up to three different accounts. You can
have your refund deposited into savings
accounts, checking accounts, and other accounts,
including individual retirement arrangements
(IRAs), that have valid routing and account
numbers. You cannot request a deposit to an
account that is not in your name.
To
have your refund split among two or three
accounts, you must file Form
8888, Direct Deposit of Refund to More Than One
Account. You cannot split your refund to
more than one account if you file Form 1040EZ-T,
Request for Refund of Federal Telephone Excise
Tax, or Form 8379, Injured Spouse Allocation.
To
have your refund deposited to only one account,
do not file Form 8888. You can designate the
account directly on your tax return.
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Earned
Income Credit Amounts Increase
Earned
income amount. The maximum amount
of income you can earn and still get the credit
is higher for 2006 than it is for 2005. You may
be able to take the credit for 2006 if:
-
You
have more than one qualifying child and you
earn less than $36,348 ($38,348 if married
filing jointly),
-
You
have one qualifying child and you earn less
than $32,001 ($34,001 if married filing
jointly), or
-
You
do not have a qualifying child and you earn
less than $12,120 ($14,120 if married filing
jointly).
The
maximum amount of adjusted gross income (AGI)
you can have and still get the credit has also
increased. You may be able to take the credit if
your AGI is less than the amount in the above
list that applies to you.
Investment
income amount. The maximum amount
of investment income you can have in 2006 and
still get the credit increases to $2,800.
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Income
Limits Increased for Reduction of Education
Savings Bond Exclusion
For
2006, the amount of your interest exclusion is
phased out (gradually reduced) if your filing
status is married filing jointly or qualifying
widow(er) and your modified adjusted gross
income (MAGI) is between $94,700 and $124,700.
You cannot take the deduction if your MAGI is
$124,700 or more. For 2005, the exclusion phased
out between $91,850 and $121,8500.
For
all other filing statuses, your interest
exclusion is phased out if your MAGI is between
$63,100 and $78,100. You cannot take a deduction
if your MAGI is $78,100 or more. For 2005, the
exclusion phased out between $61,200 and
$76,200. For more information, see chapter 9 in
Publication 970, Tax Benefits for Education.
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Educator
Expenses Deduction
If
you were an eligible educator in 2006, you can
deduct up to $250 of qualified expenses you paid
in 2006 as an adjustment to gross income, rather
than as a miscellaneous itemized deduction. This
provision, which had expired for tax years after
2005, has been extended through tax year 2007.
If you and your spouse are filing jointly and
both of you were eligible educators, the maximum
deduction is $500. However, neither spouse can
deduct more than $250 of his or her qualified
expenses.
Eligible educator. An eligible
educator is a kindergarten through grade 12
teacher, instructor, counselor, principal, or
aide who worked in a school for at least 900
hours during a school year.
Qualified expenses. Qualified
expenses include ordinary and necessary expenses
paid in connection with books, supplies,
equipment (including computer equipment,
software, and services), and other materials
used in the classroom. An ordinary expense is
one that is common and accepted in your
educational field. A necessary expense is one
that is helpful and appropriate for your
profession as an educator. An expense does not
have to be required to be considered necessary.
Qualified expenses do not include expenses for
home schooling or nonathletic supplies for
courses in health or physical education.
You
must reduce your qualified expenses by the
following amounts.
-
Excludable
U.S. series EE and I savings bond interest
from Form 8815.
-
Nontaxable
qualified tuition program earnings.
-
Nontaxable
earnings from Coverdell education savings
accounts.
-
Any
reimbursements you received for these
expenses that were not reported to you in
box 1 of your Form W-2.
How
the deduction is claimed. You
must file Form 1040 (or Form 1040NR) to take
this deduction. The deduction is claimed on Form
1040, line 23 (or Form 1040NR, line 24),
“Archer MSA Deduction.” Enter "E"
on the dotted line to the left of that line
entry if claiming educator expenses, or
"B" if claiming both an Archer MSA
deduction and the deduction for educator
expenses. If entering "B," you must
attach a statement with a breakdown of the
amount claimed for each deduction.
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Electric
and Alternative Motor Vehicles
For
2006, the list of vehicles that are qualified
hybrid vehicles for the Alternative Motor
Vehicle Credit has been expanded. The tax credit
for hybrid vehicles applies for vehicles
purchased on or after January 1, 2006, and could
be as much as $3,400 for those who purchase the
most fuel-efficient vehicles.
See
IR-2006-86,
dated June 1, 2006, and the news article, Summary
of the Credit for Qualified Hybrid Vehicles,
for more information.
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Exemption
Amount Increased
The
amount you can deduct for each exemption has
increased from $3,200 in 2005 to $3,300 in 2006.
You
may lose part of the benefit of your exemptions
if your adjusted gross income is above a certain
amount. The amount at which the phaseout begins
depends on your filing status. For 2006, the
phaseout begins at:
-
$112,875
for married persons filing separately,
-
$150,500
for single individuals,
-
$188,150
for heads of household, and
-
$225,750
for married persons filing jointly or
qualifying widow(er)s.
If
your adjusted gross income is above the amount
for your filing status, use the Deduction for
Exemptions Worksheet in the Form
1040 instructions to figure the amount you
can deduct for exemptions.
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Foreign
Earned Income Tax Worksheet
If
you claim the foreign earned income exclusion or
the foreign housing exclusion on Form 2555 or
Form 2555-EZ, your must figure your tax using
the Foreign Earned Income Tax Worksheet found in
the Instructions
for Form 1040.
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Health
Savings Account (HSA) Deduction Limits Increased
For
2006, the maximum HSA deduction increased to
$2,700 ($5,450 for family coverage). The maximum
additional deduction for individuals age 55 or
older increased to $700. For HSA purposes, the
minimum annual deductible of a high deductible
health plan increased to $1,050 ($2,100 for
family coverage) and the maximum annual
deductible and other out-of-pocket expenses
limit increased to $5,250 ($10,500 for family
coverage). For more information, see Publication
969, Health Savings Accounts and Other
Tax-Favored Health Plans.
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Income
Limits Increased for Hope and Lifetime Learning
Credits
For
2006, the amount of your Hope or lifetime
learning credit is phased out (gradually
reduced) if your modified adjusted gross income
(MAGI) is between $45,000 and $55,000 ($90,000
and $110,000 if you file a joint return). You
cannot claim an education credit if your MAGI is
$55,000 or more ($110,000 or more if you file a
joint return). This is an increase from the 2005
limits of $43,000 and $53,000 ($87,000 and
$107,000 if filing a joint return). For more
information, see chapters 2 and 3 in Publication
970, Tax Benefits for Education.
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Limit
on Itemized Deductions Increases
If
your adjusted gross income is above a certain
amount, you may lose part of your itemized
deductions. In 2006, this amount is increased to
$150,500 ($75,250 if married filing separately).
In 2005, the amount was $145,950 ($72,975 if
married filing separately). Beginning in 2006,
the amount by which these itemized deductions
are reduced is only 2/3 of the amount of the
reduction that otherwise would have applied. See
the Instructions
for Schedule A (Form 1040), line 28, for
more information on figuring the amount you can
deduct.
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Increase
in Limit on Long-Term Care and Accelerated Death
Benefits Exclusion
The
limit on the exclusion for payments made on a per
diem or other periodic basis under a
long-term care insurance contract increased for
2006 to $250 per day. The limit applies to the
total of these payments and any accelerated
death benefits made on a per diem or
other periodic basis under a life insurance
contract because the insured is chronically ill.
Under
this limit, the excludable amount for any period
is figured by subtracting any reimbursement
received (through insurance or otherwise) for
the cost of qualified long-term care services
during the period from the larger of the
following amounts.
-
The
cost of qualified long-term care services
during the period.
-
The
dollar amount for the period ($250 per day
for any period in 2006).
See
Section C of Form
8853, Archer MSAs and Long-Term Care Insurance
Contracts, and its instructions for more
information.
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Publication
1212, Guide to Original Issue Discount (OID)
Instruments
Publication
1212 will no longer be revised annually and
therefore does not contain the original issue
discount (OID) tables, Sections I-A through
III-G. The tables are only available on the IRS
website at: www.irs.gov/formspubs/article/0,,id+109875.html.
They are posted to the website in late November
or early December of each year.
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Residential
Energy Credits
You
may be eligible for two new credits, the
nonbusiness energy property credit and the
residential energy efficient property credit,
for making energy saving improvements to your
home in 2006. To take the credit, you must file
Form 5695, Residential Energy Credits. For
credit purposes, costs are treated as being paid
when the original installation of the item is
completed, or in the case of costs connected
with the construction or reconstruction of a
building, when your original use of the
constructed or reconstructed building begins. If
less than 80% of the use of an item is for
nonbusiness purposes, only that portion of the
costs that are allocable to the nonbusiness use
can be used to determine the credit.
A
home includes a house, houseboat, mobile home,
cooperative apartment, condominium, and certain
manufactured homes. You must reduce the basis of
your home by the amount of credit allowed.
If
you are a member of a qualified condominium
management association for a condominium you own
or a tenant-stockholder in a cooperative housing
corporation, you are treated as having paid your
proportionate share of any costs of such
association or corporation.
Nonbusiness
energy property credit. You may be able
to take a credit equal to the sum of:
-
10%
of the amount paid or incurred for
qualified energy efficiency improvements
installed during 2006, and
-
Any
residential energy property costs paid or
incurred in 2006.
However,
this credit is limited as follows.
-
A
total combined credit limit of $500 for
all tax years after 2005.
-
A
combined credit limit of $200 for windows
for all tax years after 2005.
-
A
credit limit for residential energy
property costs for all tax years after
2005 of $50 for any advanced main air
circulating fan; $150 for any qualified
natural gas, propane, or oil furnace or
hot water boiler; and $300 for any item of
energy efficient building property.
Qualified
energy efficiency improvements.
Qualified energy efficiency improvements are the
following building envelope components installed
on or in your main home located in the United
States if these components are new and can be
expected to remain in use for at least 5 years.
-
Any
insulation material or system that is
specifically and primarily designed to
reduce the heat loss or gain of a home
when installed in or on such home.
-
Exterior
windows (including certain storm windows
and skylights).
-
Exterior
doors (including certain storm doors).
-
Any
metal roof installed on a home, but only
if this roof has appropriate pigmented
coatings which are specifically and
primarily designed to reduce the heat gain
of the home.
For
information on determining if a home is your
main home, see Form 5695.
Caution
- To qualify for the credit, qualified energy
efficiency improvements must meet certain energy
efficiency requirements.
Residential
energy property costs.
Residential energy property costs are costs of
new qualified energy property that is installed
on or in connection with your main home that you
owned during 2006 located in the United States.
This includes labor costs properly allocable to
the onsite preparation, assembly, or original
installation of the property. Qualified energy
property is any of the following.
-
Certain
electric heat pump water heaters; electric
heat pumps; geothermal heat pumps; central
air conditioners; and natural gas,
propane, or oil water heaters.
-
Qualified
natural gas, propane, or oil furnaces or
hot water boilers.
-
Certain
advanced main air circulating fans used in
natural gas, propane, or oil furnaces.
Caution
- To qualify for the credit, qualified
energy property must meet certain performance
and quality standards.
Residential
energy efficient property credit.
You may be able to take a credit of 30% of your
costs of qualified solar electric property,
solar water heating property, and fuel cell
property. This includes labor costs properly
allocable to the onsite preparation, assembly,
or original installation of the property and for
piping or wiring to interconnect such property
to the home. This credit is limited to:
-
$2,000
for qualified solar electric property
costs,
-
$2,000
for qualified solar water heating property
costs, and
-
$500
for each half kilowatt of capacity of
qualified fuel cell property for which
qualified fuel cell property costs are
paid.
Qualified
solar electric property costs.
Qualified solar electric property costs are
costs for property that uses solar energy to
generate electricity for use in a home located
in the United States and used as your home. This
includes costs relating to a solar panel or
other property installed as a roof or a portion
of a roof. The home does not have to be your
main home.
Qualified
solar water heating property costs.
Qualified solar water heating property costs are
costs for property to heat water for use in a
home located in the United States and used as
your home if at least half of the energy used by
the property for such purpose is derived from
the sun. This includes costs relating to a solar
panel or other property installed as a roof or a
portion of a roof. To qualify for the credit,
the property must be certified for performance
by the nonprofit Solar Rating Certification
Corporation or a comparable entity endorsed by
the government of the state in which the
property is installed. The home does not have to
be your main home.
Qualified fuel cell property costs.
Qualified fuel cell property costs are costs for
qualified fuel cell property installed on or in
connection with your main home located in the
United States. Qualified fuel cell property is
an integrated system comprised of a fuel cell
stack assembly and associated balance of plant
components that converts a fuel into electricity
using electrochemical means. To qualify for the
credit, the fuel cell property must have a
nameplate capacity of at least one-half kilowatt
of electricity using an electrochemical process
and an electricity-only generation efficiency
greater than 30%.
Caution - Costs allocable to a
swimming pool, hot tub, or any other energy
storage medium that has a function other than
the function of such storage do not qualify for
the residential energy efficiency credit.
For
more information, see Form
5695.
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Social
Security and Medicare Taxes
For
2006, the employer and employee will continue to
pay:
-
6.2%
each for social security tax (old-age,
survivors, and disability insurance), and
-
1.45%
each for Medicare tax (hospital insurance).
Wage
limits. For social security tax, the
maximum amount of 2006 wages subject to the tax
has increased from $90,000 to $94,200. For
Medicare tax, all covered 2006 wages are subject
to the tax.
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Standard
Deduction Amount Increased
The
standard deduction for taxpayers who do not
itemize deductions on Schedule A of Form 1040
is, in most cases, higher for 2006 than it was
for 2005. The amount depends on your filing
status, whether you are 65 or older or blind,
and whether an exemption can be claimed for you
by another taxpayer.
The
basic standard deduction amounts for 2006 are:
-
Head
of household — $7,550
-
Married
taxpayers filing jointly and qualifying
widow(er)s — $10,300
-
Married
taxpayers filing separately — $5,150
-
Single
— $5,150
The
standard deduction amount for an individual who
may be claimed as a dependent by another
taxpayer may not exceed the greater of $850 or
the sum of $300 and the individual's earned
income.
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Standard
Mileage Rates
For
tax years beginning in 2006, the allowable
deductions for the standard mileage rate are as
follows:
-
Business
miles. The standard mileage rate for the
cost of operating your car changes to 44.5
cents a mile for all business miles driven.
-
Charitable
services. The standard mileage rate
allowed for use of your car when you use
your car to provide charitable services to a
charitable organization is 14
cents a mile.
-
Charitable
services — Hurricane
Katrina relief services. If you
used your vehicle in giving services to
a charitable organization to provide relief
related to Hurricane Katrina, the
standard mileage rate allowed for use of
your car is 32 cents a
mile.
-
Medical
reasons. The standard mileage rate
allowed for use of your car for medical
reasons is 18 cents a mile.
-
Moving.
The standard mileage rate for determining
moving expenses is 18 cents
a mile.
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Tax-Exempt
Interest Reporting
Beginning
in 2006, state and local governments are
required to report interest paid on tax-exempt
state and local bonds on Form 1099-INT, Interest
Income. This amount must be shown on your tax
return and is for information only.
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2006
Federal Income Tax Rate Schedules
The
2006
tax rate schedules are provided so that
you can compute your estimated tax for 2006.
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Tuition
and Fees Deduction
You
may be able to deduct qualified tuition and fees
paid during the year for yourself, your spouse,
or your dependent. This provision, which
had expired for tax years after 2005, has been
extended through tax year 2007.
Who
can claim the deduction. You can
take this deduction only if all of the following
apply.
-
You
paid qualified tuition and fees in 2006
for yourself, your spouse, or your
dependent(s).
-
Your
filing status is any status except married
filing separately.
-
Your
modified adjusted gross income (AGI) is
not more than: $80,000 if single, head of
household, or qualifying widow(er);
$160,000 if married filing jointly. Use
lines 1 through 3 of the Tuition
and Fees Deduction Worksheet to figure
your modified AGI. You, or your
spouse if filing jointly, cannot be
claimed as a dependent on someone's (such
as your parent's) 2006 tax return.
-
You
are not claiming an education credit for
the same student. See the instructions for
Form 8863.
-
You
were a U.S. citizen or resident alien for
all of 2005 or you were a nonresident
alien for any part of 2006 and you are
filing a joint return.
How
the deduction is figured. Use the
Tuition and Fees Deduction Worksheet to figure
your deduction.
Exception.
Use Worksheet 6-1 in Publication 970 instead
of the worksheet below to figure your tuition
and fees deduction if you file Form 2555,
2555-EZ, or 4563, or you exclude income from
sources within Puerto Rico.
Qualified
tuition and fees. Qualified
tuition and fees are amounts paid in 2006 for
tuition and fees required for the student's
enrollment or attendance at an eligible
educational institution during 2006. Tuition and
fees paid in 2006 for an academic period that
begins in the first 3 months of 2007 can also be
used in figuring your deduction. Amounts paid
include those paid by credit card or with
borrowed funds. An eligible educational
institution includes most colleges,
universities, and certain vocational schools.
Qualified
tuition and fees do not include amounts paid for
the following items.
-
Room
and board, insurance, medical expenses
(including student health fees),
transportation, or other similar personal,
living, or family expenses.
-
Course-related
books, supplies, equipment, and
nonacademic activities, except for fees
required to be paid to the institution as
a condition of enrollment or attendance.
-
Any
course involving sports, games, or
hobbies, unless such course is part of the
student's degree program.
Qualified
tuition and fees must be reduced by the
following benefits.
-
Excludable
U.S. series EE and I savings bond interest
from Form 8815.
-
Nontaxable
qualified tuition program earnings.
-
Nontaxable
earnings from Coverdell education savings
accounts.
-
Any
scholarship, educational assistance
allowance, or other payment (but not
gifts, inheritances, etc.) excluded from
income.
How
the deduction is claimed.
You must file Form 1040 to take this deduction.
The deduction is claimed on Form 1040, line 35,
“Domestic production activities deduction.”
Enter "T" on the line to the left of
that line entry if claiming the deduction for
tuition and fees, or "B" if claiming
both a deduction for domestic production
activities and the deduction for tuition and
fees. For those entering "B," you must
attach a statement with a breakdown of the
amount claimed for each deduction.
More
information. See chapter 6 of
Publication 970 for more information about this
deduction.
Tuition
and Fees Deduction Worksheet
Before
you begin:
-
Figure
any write-in adjustments to be entered on
the dotted line next to Form 1040, line
36.
-
Be
sure you read the Exception under How
the deduction is figured to see
if you can use this worksheet instead of
Worksheet 6-1 in chapter 6 of Publication
970.
1.
Enter the amount from Form 1040, line 22.
1.__________________________________
2.
Enter the total from Form 1040, lines 23 through
33, jury duty pay included on line 34, plus
any write-in adjustments you entered
on the dotted line next to line 36.
2.__________________________________
3.
Subtract the amount on line 2 from the amount on
line 1. If the result is more than $80,000
($160,000 if married filing jointly), you cannot
take the deduction for tuition and fees.
3.__________________________________
4.
Tuition and fees deduction . Is the
amount on line 3 more than $65,000
($130,000 if married filing jointly)?
-
If
yes , enter the total qualified
tuition and fees you paid in 2006. Do
not enter more than $2,000.
Also, include this amount on Form 1040, line
35 (see, How the deduction is claimed).
-
If
no, enter the total qualified
tuition and fees you paid in 2006. Do
not enter more than $4,000.
Also, include this amount on Form 1040, line
35 (see, How the deduction is claimed)
4._________________________________
Note.
Do not include this amount in figuring
any other deduction on your return (such as on
Schedule A, C, E, etc.).
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