Tax Tips - Individuals
5 Tips for Early Preparation
Earlier is better when it comes to working on your taxes. The IRS encourages everyone to get a head start on tax preparation. Not only do you avoid the last-minute rush, early filers also get a faster refund.
There are seven easy ways to get a good jump on your taxes long before the April 15 deadline rolls around:
- Gather your records in advance. Make sure you have all the records you need, including W-2s and 1099s. Don’t forget to save a copy for your files.
- Get the right forms. They’re available around the clock on IRS.gov in the Forms and Publications section.
- Take your time. Don’t forget to leave room for a coffee break when filling out your tax return. Rushing can mean making a mistake — and that can be expensive!
- Double-check your math and Social Security number. These are among the most common errors on tax returns. Taking care on these reduces your chances of hearing from the IRS.
- Get the fastest refund. When you file early, you get your refund faster. Using e-filing with direct deposit gets you a refund in half the time as paper filing.
Oops! You’ve discovered an error after your tax return has been filed. What should you do? You may need to amend your return.
The IRS usually corrects math errors or requests missing forms (such as W-2s) or schedules. In these instances, do not amend your return. However, do file an amended return if any of the following were reported incorrectly:
- Your filing status
- Your total income
- Your deductions or credits
Use Form 1040X, Amended U.S. Individual Income Tax Return, to correct a previously filed paper or electronically-filed Form 1040, 1040A, or 1040EZ return. Be sure to enter the year of the return you are amending at the top of Form 1040X. If you are amending more than one tax return, use a separate 1040X for each year and mail each in a separate envelope to the IRS processing center for your state. The 1040X instructions list the addresses for the centers.
Form 1040X has three columns. Column A is used to show original or adjusted figures from the original return. Column C is used to show the corrected figures. The difference between the figures in Columns A and C is shown in Column B. You should explain the items you are changing and the reason for each change on the back of the form.
If the changes involve another schedule or form, attach it to the 1040X. For example, if you are filing a 1040X because you have a qualifying child and now want to claim the Earned Income Tax Credit, you must complete and attach a Schedule EIC to the amended return.
If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund. If you owe additional tax for the prior year, Form 1040X must be filed and the tax paid by April 15 of this year, to avoid any penalty and interest.
You generally must file Form 1040X to claim a refund within three years from the date you filed your original return, or within two years from the date you paid the tax, whichever is later. Please contact us for more!
Ayuda en Espanol
If you need federal tax information, the IRS provides free Spanish language products and services. Pages on the IRS.gov, pre-recorded tax topics, refund information, tax publications and toll-free telephone assistance are all available in the Spanish-language.
The Spanish-language page (http://www.irs.gov/espanol/index.html) on this web site has links to tax information such as forms and publications, warnings about tax scams that victimize taxpayers, information on the Earned Income, child and various other tax credits, and more. This year, information on tax return filing is conveniently organized and links to additional publications are added. Look for a new interactive tool called EITC Assistant to help you learn if you are eligible to receive the Earned Income Tax Credit.
TeleTax is a toll-free, automated telephone service available in English and Spanish. TeleTax provides helpful pre-recorded tax topic messages and refund information. You can find a list of more than 150 TeleTax topics in the instructions for Form 1040, 1040A or 1040EZ. TeleTax can also help you if it has been at least four weeks since you filed your tax return and you want to check on the status of your federal refund. Having a copy of the tax return handy will help you respond to the prompts on the automated system. TeleTax is available 24 hours a day, 7 days a week at 1-800-829-4477. on this web site has links to tax information such as forms and publications, warnings about tax scams that victimize taxpayers, information on the Earned Income, child and various other tax credits, and more. This year, information on tax return filing is conveniently organized and links to additional publications are added. Look for a new interactive tool called EITC Assistant to help you learn if you are eligible to receive the Earned Income Tax Credit.
Filing an Extension
If you can't meet the April 15 deadline to file your tax return, you can get an automatic six-month extension of time to file from the IRS. The extension will give you extra time to get the paperwork into the IRS, but it does not extend the time you have to pay any tax due. You will owe interest on any amounts not paid by the April deadline, plus a late payment penalty if you have paid less than 90 percent of your total tax by that date.
You must make an accurate estimate of any tax due when you request an extension. You may also send a payment for the expected balance due, but this is not required to obtain the extension.
To get the automatic extension, file Form 4868, Application for Extension of Time to File U.S. Individual Income Tax Return, with the IRS by the April 15 deadline, or make an extension-related electronic payment. You can file your extension request by phone or by computer, or mail the paper Form 4868 to the IRS.
You can file Form 4868 by phone anytime through April 15. You will need to provide certain information from your federal income tax return. The special toll-free phone number is 1-888-796-1074. Use Form 4868 as a worksheet to prepare for the call and have a copy of your 2003 federal income tax return available.
The system will give you a confirmation number to verify that the extension request has been accepted. Put this confirmation number on your copy of Form 4868 and keep it for your records. Do not send the form to the IRS. As this is the area of our expertise, please contact us for more detailed information on how to file an extension properly!
The IRS reminds taxpayers that the rules for taking a tax deduction for donating cars to charities have changed this year. The American Jobs Creation Act of 2004 has altered the rules for the contribution of used motor vehicles, boats and planes after Dec. 31, 2004. Starting then, if the claimed value of the donated motor vehicle, boat or plane exceeds $500 and the item is sold by the charitable organization, the taxpayer is limited to the gross proceeds from the sale.
Last year, however, the new rules did not apply. Under the rules in effect for this year, taxpayers are able to deduct the fair market value of the contributed property.
People who want to take a deduction for the donation of their vehicle on their tax return should take quite a few steps, but here is the most obvious:
Check that the Organization is Qualified.
Taxpayers must make certain that they contribute their car to an eligible organization; otherwise, their donation will not be tax deductible. Taxpayers can search Publication 78 online to check that an organization is qualified. Publication 78 is an annual, cumulative list of most organizations that are qualified to receive deductible contributions. Publication 78 is also available in many public libraries. In addition, taxpayers can call IRS Tax Exempt/Government Entities Customer Service at 1-877-829-5500. Be sure to have the organization’s correct name and its headquarters location, if possible. Churches, synagogues, temples, mosques and governments are not required to apply for this exemption in order to be qualified. Please contact us if you’re considering a car donation for your tax return!
When preparing to file your federal tax return, don’t forget your contributions to charitable organizations. Your donations can add up to a nice tax deduction if you itemize on IRS Form 1040, Schedule A.
Here are a few tips to help make sure your contributions pay off on your tax return:
You cannot deduct contributions made to specific individuals, political organizations and candidates, the value of your time or services and the cost of raffles, bingo, or other games of chance.
To be deductible, contributions must be made to qualified organizations.
Organizations can tell you if they are qualified and if donations to them are deductible. IRS.gov has an exempt organization search feature to help you see if an organization is qualified. IRS Publication 78, Cumulative List of Organizations, lists all charitable organizations except those most recently granted tax exempt status. Pub. 78 is available online and in many public libraries. Alternatively, contact us for more!
Tax Credit For Hybrid Vehicles
The Energy Policy Act of 2005 replaced the clean-fuel burning deduction with a tax credit known as the Alternative Motor Vehicle Credit. The tax credit for hybrid vehicles applies to vehicles purchased or placed in service on or after January 1, 2006.
Hybrid vehicles have drive trains powered by both an internal combustion engine and a rechargeable battery. Many currently available hybrid vehicles may qualify for the credit. Taxpayers may claim the credit on their 2006 tax returns only if they placed a qualified hybrid vehicle in service in 2006. More than 40 different models of hybrids are eligible for the credit.
The credit is available only to the original purchaser of a new qualifying vehicle. If the qualifying vehicle is leased the credit is available only to the leasing company.
To find out whether your car qualifies for the hybrid tax credit and the maximum amount of that credit, you can go to the IRS.gov website and search for "qualified hybrid vehicles."
Refinancing your Home
Taxpayers who refinanced their homes may be eligible to deduct some costs associated with their loans.
Generally, for taxpayers who itemize, the “points” paid to obtain a home mortgage may be deductible as mortgage interest. Points paid to obtain an original home mortgage can be, depending on circumstances, fully deductible in the year paid. However, points paid solely to refinance a home mortgage usually must be deducted over the life of the loan.
For a refinanced mortgage, the interest deduction for points is determined by dividing the points paid by the number of payments to be made over the life of the loan. This information is usually available from lenders. Taxpayers may deduct points only for those payments made in the tax year. For example, a homeowner who paid $2,000 in points and who would make 360 payments on a 30-year mortgage could deduct $5.56 per monthly payment, or a total of $66.72 if he or she made 12 payments in one year.
However, if part of the refinanced mortgage money was used to finance improvements to the home and if the taxpayer meets certain other requirements, the points associated with the home improvements may be fully deductible in the year the points were paid. Also, if a homeowner is refinancing a mortgage for a second time, the balance of points paid for the first refinanced mortgage may be fully deductible at pay off.
Other closing costs — such as appraisal fees and other non-interest fees — generally are not deductible. Additionally, the amount of Adjusted Gross Income can affect the amount of deductions that can be taken. Please contact us if you’ve recently refinanced, and we can be a big help!
Credit for the Elderly or Disabled
You may be able to take the Credit for the Elderly or the Disabled if you were age 65 or older at the end of last year, or if you are retired on permanent and total disability, according to the IRS. Like any other tax credit, it’s a dollar-for-dollar reduction of your tax bill. The maximum amount of this credit is constantly changing.
You can take the credit for the elderly or the disabled if:
- You are a qualified individual,
- Your nontaxable income from Social Security or other nontaxable pension is less than $3,750 to $7,500 (also depending on your filing status).
Generally, you are a qualified individual for this credit if you are a U.S. citizen or resident at the end of the tax year and you are age 65 or older, or you are under 65, retired on permanent and total disability, received taxable disability income, and did not reach mandatory retirement age before the beginning of the tax year.
If you are under age 65, you can qualify for the credit only if you are retired on permanent and total disability. This means that:
- You were permanently and totally disabled when you retired, and
- You retired on disability before the end of the tax year.
Even if you do not retire formally, you are considered retired on disability when you have stopped working because of your disability. If you feel you might be eligible for this credit, please contact us for assistance.
Selling your Home
If you sold your main home, you may be able to exclude up to $250,000 of gain ($500,000 for married taxpayers filing jointly) from your federal tax return. This exclusion is allowed each time that you sell your main home, but generally no more frequently than once every two years.
To be eligible for this exclusion, your home must have been owned by you and used as your main home for a period of at least two out of the five years prior to its sale. You also must not have excluded gain on another home sold during the two years before the current sale.
If you and your spouse file a joint return for the year of the sale, you can exclude the gain if either of you qualify for the exclusion. But both of you would have to meet the use test to claim the $500,000 maximum amount.
To exclude gain, a taxpayer must both own and use the home as a principal residence for two of the five years before the sale. The two years may consist of 24 full months or 730 days. Short absences, such as for a summer vacation, count as periods of use. Longer breaks, such as a one-year sabbatical, do not.
If you do not meet the ownership and use tests, you may be allowed to exclude a reduced maximum amount of the gain realized on the sale of your home if you sold your home due to health, a change in place of employment, or certain unforeseen circumstances. Unforeseen circumstances include, for example, divorce or legal separation, natural or man-made disaster resulting in a casualty to your home, or an involuntary conversion of your home. Send us a message for more!
With more and more United States citizens earning money from foreign sources, the IRS reminds people that they must report all such income on their tax return, unless it is exempt under federal law. U.S. citizens are taxed on their worldwide income.
This applies whether a person lives inside or outside the United States. The foreign income rule also applies regardless of whether or not the person receives a Form W-2, Wage and Tax Statement, or a Form 1099 (information return).
Foreign source income includes earned income, such as wages and tips, and unearned income, such as interest, dividends, capital gains, pensions, rents and royalties.
An important point to remember is that citizens living outside the U.S. may be able to exclude up to $80,000 of their foreign source income if they meet certain requirements. However, the exclusion does not apply to payments made by the U.S. government to its civilian or military employees living outside the U.S. Please contact us if you feel you may have earned foreign income to learn more!
Did you know that you may be able to deduct certain taxes on your federal income tax return? The IRS says you can if you file Form 1040 and itemize deductions on Schedule A. Deductions decrease the amount of income subject to taxation. There are four types of deductible non-business taxes:
- State and local income and sales taxes;
- Real estate taxes;
- Personal property taxes; and
- Foreign income taxes.
This year, people will have a chance of claiming a state and local tax deduction for either income or sales taxes on their returns.
You can deduct any estimated taxes paid to state or local governments and any prior year's state or local income tax as long as they were paid during the tax year. If deducting sales taxes instead, you may deduct actual expenses or use optional tables provided by the IRS to determine your deduction amount, relieving you of the need to save receipts. Sales taxes paid on motor vehicles and boats may be added to the table amount, but only up to the amount paid to the general sales tax rate.
Taxpayers will check a box on Schedule A, Itemized Deductions, to indicate whether their deduction is for income or sales tax.
Deductible real estate taxes are usually any state, local, or foreign taxes on real property. If a portion of your monthly mortgage payment goes into an escrow account and your lender periodically pays your real estate taxes to local governments out of this account, you can deduct only the amount actually paid during the year to the taxing authorities. Your lender will normally send you a Form 1098, Mortgage Interest Statement, at the end of the tax year with this information. Call us or contact us today to find out how we can save you money!
If you gave any one person gifts valued at more than $12,000, it is necessary to report the total gift to the Internal Revenue Service. You may even have to pay tax on the gift.
The person who received your gift does not have to report the gift to the IRS or pay either gift or income tax on its value.
You make a gift when you give property, including money, or the use of or income from property, without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift.
There are some exceptions to the tax rules on gifts. The following gifts do not count against the annual limit:
- Tuition or medical expenses that you pay directly to an educational or medical institution for someone's benefit
- Gifts to your spouse
- Gifts to a political organization for its use
- Gifts to charities
If you are married, both you and your spouse can give separate gifts of up to the annual limit to the same person without making a taxable gift. Please contact us for more!
Marriage or Divorce
Newlyweds and the recently divorced should make sure that names on their tax returns match those registered with the Social Security Administration (SSA). A mismatch between a name on the tax return and a Social Security number (SSN) could unexpectedly increase a tax bill or reduce the size of any refund.
For newlyweds, the tax scenario can begin when the bride says "I do" and takes her husband's surname, but doesn't tell the SSA about the name change. If the couple files a joint tax return with her new name, the IRS computers will not be able to match the new name with the SSN.
Similarly, after a divorce, a woman who had taken her husband’s name and had made that change known to the SSA should contact the SSA if she reassumes a previous name.
It's easy to inform the SSA of a name change by filing Form SS-5 at a local SSA office. It usually takes two weeks to have the change verified. The form is available on the agency's Web site, www.ssa.gov, by calling toll free 1-800-772-1213 and at local offices. The SSA Web site provides the addresses of local offices. Alternatively, please contact us as we can be of even greater assistance with your spousal situation.
Deduction of State and Local Taxes
If you itemize your taxes, you may choose to deduct state and local sales taxes instead of state and local income taxes. The American Jobs Creation Act of 2004 gives taxpayers this option for this year’s tax returns.
IRS Publication 600, Optional State Sales Tax Tables, will help you determine your sales tax deduction amount in lieu of saving receipts throughout the year. Use your income level and number of exemptions to find the sales tax amount for your state. The table instructions explain how to add an amount for local sales taxes if appropriate.
You may also add to the table amount any sales taxes paid on:
A motor vehicle, but only up to the amount of tax paid at the general sales tax rate
An aircraft, boat, home (including mobile or prefabricated), or home building materials, if the tax rate is the same as the general sales tax rate.
For example, the State of Washington has a motor vehicle sales tax of 0.3 percent in addition to the state and local sales tax. A Washingtonian who purchased a new car could add the tax paid at the general sales tax rate to the table amount, but not the 0.3 percent motor vehicle sales tax paid. This is simply an example, contact us to see if this is applicable to you!
Filing Deadline and Payment Options
If you’re trying to beat the tax deadline, there are several options for last-minute help. If you need a form or publication, you can download copies from the Forms page on our website. If you find you need more time to finish your return, you can get a four-month extension of time to file using Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. And if you have trouble paying your tax bill, the IRS has several payment options available.
You can get an automatic extension of time to file by using IRS e-filing options — by phone or personal computer, or through an authorized e-file tax professional — or by paying part or all of any estimated amount of tax due using a credit card. You can pay your tax using a credit card either by phone or over the Internet. You can also get an extension by mailing a paper Form 4868 to the IRS.
The extension will give you extra time to get the paperwork to the IRS, but it does not extend the time you have to pay any tax due. You have to make an accurate estimate of any tax due when you request an extension. You can also send a payment for the expected balance due, but this is not required to get the extension. However, you will owe interest on any amounts not paid by the April 15 deadline, plus a late payment penalty if you have paid less than 90 percent of your total tax by that date.
Refund, Where’s My Return?
Are you expecting a tax refund from the Internal Revenue Service this year? If you file a complete and accurate paper tax return, your refund should be issued in about six to eight weeks from the date IRS receives your return. If you file your return electronically, your refund should be issued in about half the time it would take if you filed a paper return — even faster when you choose direct deposit.
You can have a refund check mailed to you, or you may be able to have your refund electronically deposited directly into your bank account. Direct deposit into a bank account is more secure because there is no check to get lost. And it takes the U.S. Treasury less time than issuing a paper check. If you prepare a paper return, fill in the direct deposit information in the “Refund” section of the tax form, making sure that the routing and account numbers are accurate. Incorrect numbers can cause your refund to be misdirected or delayed. Direct deposit is also available if you electronically file your return.
A few words of caution — some financial institutions do not allow a joint refund to be deposited into an individual account. Check with your bank or other financial institution to make sure your direct deposit will be accepted.
You may not receive your refund as quickly as you expected. A refund can be delayed for a variety of reasons. For example, a name and Social Security number listed on the tax return may not match the IRS records. You may have failed to sign the return or to include a necessary attachment, such as Form W-2, Wage and Tax Statement. Or you may have made math errors that require extra time for the IRS to correct.
To check the status of an expected refund, use "Track My Refund" an interactive tool available on our links page. Simple online instructions guide you through a process that checks the status of your refund after you provide identifying information from your tax return. Once the information is processed, results could be one of several responses.
Ten Ways to Avoid Problems at Tax Time
Looking for ways to avoid the last-minute rush for doing your taxes? The IRS offers these tips:
- Don't Procrastinate. Resist the temptation to put off your taxes until the last minute. Your haste to meet the filing deadline may cause you to overlook potential sources of tax savings and will likely increase your risk of making an error.
- Organize Your Tax Records. Tax preparation time can be significantly reduced if you develop a system for organizing your records and receipts. Start with the income, deduction or tax credit items that were on last year’s return.
- Visit the IRS Online. Millions of taxpayers visited the IRS Web site last year, downloading nearly 600 million forms, publications and a variety of topic-oriented tax information. Anyone with Internet access can find tax law information and answers to frequently asked tax questions.
- Take Advantage of Free Assistance. The IRS offers recorded messages on about 150 tax topics through its toll-free TeleTax service at 1-800-829-4477. It also offers federal tax forms and publications at 1-800-TAX-FORM (1-800-829-3676). Some libraries, post offices, banks, grocery stores, copy centers and office supply stores carry the most widely requested forms and instructions. Libraries may also have reference sets of IRS publications.
The IRS also staffs a tax Help Line for Individuals at 1-800-829-1040. Help for small businesses, corporations, partnerships and trusts which need information or assistance preparing business returns is available at the Business and Specialty Tax Line at 1-800-829-4933. Both lines are staffed from 7 a.m. to 10 p.m. weekdays. In addition, the Help Line for Individuals is available from 10 a.m. to 3 p.m. on Saturdays though April. All times are local, except in Alaska and Hawaii, which should use Pacific Time.
Hearing-impaired individuals with access to TTY/TDD equipment may call 1-800-829-4059 to ask questions or to order forms and publications.
- Use IRS Taxpayer Assistance Centers and Vounteer Programs. Free tax help is available at IRS offices nationwide. Also, check your newspaper or local IRS office to find locations for Volunteer Income Tax Assistance or Tax Counseling for the Elderly sites. To obtain the location, dates, and hours of the VITA or TCE volunteer site closest to you, call the IRS toll-free Tax Help Line for Individuals at 1-800-829-1040. Check this Web site to find the local IRS office nearest you.
- Have your accountant Double-Check Your Math and Data Entries. Review your return for possible math errors and make sure you have provided the names and correct (and legibly written) Social Security or other identification numbers for yourself, your spouse and your dependents.
- Have Your Refund Deposited Directly to Your Bank Account. Another way to speed up your refund and reduce the chance of theft is to have the amount deposited directly to your bank account. Check the tax instructions for details on entering the routing and account numbers on your tax return. Make sure the numbers you enter are correct. Wrong numbers can cause your refund to be misdirected or delayed.
- Don't Panic if You Can't Pay. If you can’t immediately pay the taxes you owe, consider some stress-reducing alternatives. You can apply for an IRS installment agreement, suggesting your own monthly payment amount and due date, and getting a reduced late payment penalty rate. You also have various options for charging your balance on a credit card, either as part of an electronic return or directly through a processing agent, either by phone or online.
Electronic filers with a balance due can file early and authorize the government’s financial agent to take the money directly from their checking or savings account on the April 15 due date, with no fee.
Note that if you file your tax return or a request for a filing extension on time, even if you can’t pay, you avoid potential late filing penalties.
- Have Your Accountant Request an Extension of Time to File — But Pay on Time. If the clock runs out, you can get an automatic six-month extension of time to file, to October 15. An extension of time to file does not give you an extension of time to pay, however. You can call 1-888-796-1074, e-file a Form 4868, Application for Automatic Extension of Time to File, that is included in most tax preparation software, or send a paper Form 4868 to the IRS to request the extension. You will need the adjusted gross income and total tax amounts from last year's return if you request the extension by computer or phone. You may also get an extension by charging your expected balance on a credit card, and then you won’t have to file the form. Contact Official Payments Corporation or Link2Gov Corporation. There is no IRS fee for credit card payments, but the processors charge a convenience fee.
- Contact Us!
The Tax Advocate Service, provided by the IRS
Have you tried everything to resolve a tax problem with the IRS but are still experiencing delays? Are you facing what you consider to be an economic burden or hardship due to IRS collection or other actions? If so, you can seek the assistance of the Taxpayer Advocate Service.
You may request the assistance of the Taxpayer Advocate if you find that you can no longer provide for basic necessities such as housing, transportation or food because of IRS actions. You can also seek help from the Taxpayer Advocate Service if you own a business and are unable to meet basic expenses such as payroll because of IRS actions. A delay of more than 30 days to resolve a tax related problem or no response by the date promised may also qualify you for assistance.
Qualified taxpayers will receive personalized service from a knowledgeable Taxpayer Advocate. The Advocate will listen to your situation, help you understand what needs to be done to resolve it, and stay with you every step of the way until your problem is resolved to the fullest extent permitted by law.
The Taxpayer Advocate Service is an independent organization within the IRS and can help clear up problems that resulted from previous contacts with the IRS. Taxpayer Advocates will ensure that your case is given a complete and impartial review. What’s more, if your problem affects other taxpayers, the Taxpayer Advocate Service can work to change the system.
You can gain quick access to the Taxpayer Advocate Service by contacting us, or the IRS directly toll-free 1-877-777-4778.
Tips and Taxes
Do you work at a hair salon, barber shop, casino, golf course, hotel or restaurant or drive a taxicab? The tip income you receive as an employee from those services is taxable income, advises the IRS.
As taxable income, these tips are subject to federal income, Social Security and Medicare taxes, and may be subject to state income tax as well.
You must keep a running daily log of all your tip income and tips paid out. This includes cash that you receive directly from customers, tips from credit card charges from customers that your employer pays you, the value of any non-cash tips such as tickets or passes that you receive, and the amount of tips you paid out to other employees through tip pools or tip splitting and the names of those employees.
You can use IRS Publication 1244, Employee's Daily Record of Tips and Report of Tips to Employer, to record your tip income. For a free copy of Publication 1244, call the IRS toll free at 1-800-TAX-FORM (1-800-829-3676).
If you receive $20 or more in tips in any one month, you should report all your tips to your employer. Your employer is required to withhold federal income, Social Security and Medicare taxes and to report the correct amount of your earnings to the Social Security Administration (which will affect your benefits when you retire or if you become disabled, or your family's benefits if you die). Contact us so your wages are properly reported!
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