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Darkest Before Dawn

Darkest Before the Dawn

Happy New Year!  Many of us thought 2021 could not be as eventful as 2020 – we were wrong!  It goes to show that you never truly know when or how change is coming.  On top of new legislation, COVID death’s peaking and rioting at the Capitol, the disconnect between our country’s political disarray and the exuberant stock market further adds confusion to the chaos.

Here’s what we do know. The Consolidated Appropriations Act of 2021 was signed into law on December 27th.  This massive 5,593 page bill included $900 billion for the coronavirus aid package (including stimulus checks & PPP loans), as well as addressed tax planning provisions, and a permanent medical expense provision.

Stimulus Checks

Under the new coronavirus aid package, stimulus checks of $600 per eligible person began disbursing on January 4th, 2021. Eligible persons include a taxpayer, their spouse, and any dependent children. Similar to the CARES Act, the stimulus checks phase out if your income exceeds the threshold of $75,000 for Single Filers, and $150,000 for Married Filing Jointly. Unfortunately for many who experienced the brunt of financial hardship in 2020, the stimulus was based on your 2019 tax return. However, those who qualified based on their 2020 income can apply for a rebate when filing their 2020 taxes. Additionally, President-elect Joe Biden has also promised more stimulus to come when he is in office.

Paycheck Protection Program (PPP)

The new COVID-19 relief package aims to offer $348 billion of additional funding to the hardest hit businesses. Of this, $35 billion is set aside for first time borrowers who did not apply for the PPP1 loan. To qualify for PPP2, businesses must have less than 300 employees, and have encountered 25% lower revenues in any 2020 quarter compared to the same quarter the year prior. The PPP2 loan application is expected to be made available by lending institutions in mid-January. The application window will close on March 31st 2021, so eligible applicants should organize their finances now. PPP2 applicants do not need to have their PPP1 loans forgiven in order to apply for a PPP2 loan.  

Other Appropriations Act Highlights

In 2020, Required Minimum Distributions (RMDs) were waived under the CARES Act.  However, 2021 RMDs are NOT waived under the new legislation – in other words, if you’re over age 72, you have to take an RMD this year. The new bill did extend the charitable gifting provision from 2020 through 2021, which allows individuals a tax deduction on qualified donations up to 100% of Adjusted Gross Income (AGI).

Political Changes Ahead

President-elect Biden will be sworn into office on January 20, 2021 – some hope sooner. With the recent Senate wins in Georgia by Raphael Warnock and Jon Ossoff, Democrats and Republicans will now be tied at 50 seats each in the Senate. In such a case, Vice President-elect Kamala Harris will serve as the tie-breaking vote, giving Democrats control of the Senate. That means President-elect Biden will lead the country with both the House and the Senate in Democratic control. This could pave the way for President-elect Biden to enact some of his campaign agendas for tax, health-care, education and social justice reform. So far the stock market appears to like those prospects, as both the Dow and S&P 500 climbed to new highs while the Capitol building was invaded by rioters. The stock market confuses many, but that’s because the stock market lives in the future rather than the present.  The stock market looks ahead and is already focused on the prospects of COVID recovery, positive future GDP, and predictable political policies. 

However, it should be noted that even with Democrats in control of the Senate, the 60-vote requirement to cut off debate and proceed to a vote necessitates that Democrats gain Republican backing on the most important legislative pieces. That also means that change may be more moderate than Biden campaigned on, and the stock market likes the idea of predictability and balance. For investors, moderation could mean the preferential capital gains tax rate of 15% on long-term investment gains is kept intact rather than raised to ordinary income rates, for example. President-elect Biden has said he will repeal the Tax Cuts and Jobs Act, which would raise the corporate tax rates to their prior levels and raise the top income tax bracket for individuals earning more than $400,000 per year. However, it is anticipated that tax law changes will take effect as of 1/1/2022, rather than retroactively for 2021, so anyone affected by changes will have time to plan in advance.  

As difficult has 2020 has been and as dark as 2021 has started, they say it is darkest before the dawn.  As we enter 2021, may we unite as Americans and focus on restoration and healing. We wish you all good health and financial wellness in the new year.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

Sources:
https://buckinghamstrategicpartners.com/perspectives/what-you-need-to-know-about-stimulus-2-0/
https://www.kitces.com/blog/coronavirus-stimulus-2-omnibus-consolidated-appropriations-act-2021-stimulus-checks/
https://www.natlawreview.com/article/consolidated-appropriations-act-2021-ppp-and-tax-provisions
https://news.bloomberglaw.com/us-law-week/what-biden-gets-with-slimmest-possible-control-of-u-s-senate

 

 

 

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Estate & Tax Changes

Estate and Tax Changes on the Horizon

Under President Trump, much of the tax reform has favored large multi-national corporations and the top 1% of individual earners in the United States. For example, the Tax Cuts and Jobs Act of 2017 lowered the top corporate income tax rate from 35% to 21% and significantly reduced the Alternative Minimum Tax, a review meant to ensure high income earners pay a proportionate amount of tax after deductions. Under Trump’s presidency, the estate tax exemption was raised from approximately $5.5 million per person in 2017 to $11.6 million per person in 2020.  Due to the generous tax exemption, the Tax Policy Center estimates that less than 0.1% of the estimated 2.7 million people who passed in 2020 will be subject to estate taxes.[i]

President-elect Joe Biden campaigned he would initiate tax reform to ensure the wealthiest Americans would pay their fair share in taxes. Based on his tax plan prior to the election, President-elect Biden proposed to raise taxes on individuals with income above $400,000 through individual taxes, capital gains taxes and payroll taxes. Biden promised he would not raise taxes on individuals making less than $400,000 per year. Rather he proposed middle class tax cuts to give working families financial support.[ii] Biden stated he would raise the corporate income tax rate, reduce the estate tax exemption amount to $3.5 million per person, and increase the estate tax rate to 45%.[iii]

President-elect Biden’s plan to reduce the estate tax exclusion would put a lot more people into estate tax territory. This has some high net worth individuals examining if they should gift assets out of their estate now under the old estate tax exclusions with the hope there will be no claw-back provision in the future. However, many believe that if the Senate remains in Republican control (we won’t know for sure until the Georgia run-off in January 2021), Biden’s tax plan will not pass in its current form, as he will need the presumably Republican held Senate to pass his bill.  Further, the tax rule is not expected to take affect for the 2021 tax year.

Layered on top of the pending national tax reform, California recently passed Proposition 19 by a slim majority.  One highlight of the Proposition is the ability for eligible senior homeowners to transfer their tax assessments anywhere within the state, even to a more expensive home with an upward adjustment. A second highlight is the requirement that inherited homes that are not used as principal residences by the inheritors will be reassessed for property tax at market value when transferred.[iv]

The second change may have far reaching effects.  Since 2010, it is estimated that approximately 650,000 Californians inherited homes from relatives and were able to maintain their low property taxes. California is already one of the most expensive states to live in. Real estate leaders note the passage of Prop 19 could affect many blue collar workers and families who bought in previous decades when homes were affordable and have traditionally passed down their largest appreciated asset, their home, to their kids. Under Prop 19, the next generation will be subject to a tax increase, which may lead to a change in demographics if the inheritors decide they cannot afford the cost of maintenance and sell inherited homes.[v]

While it is too early to make any sweeping estate tax changes in preparation for President-elect Biden’s tax reform, many agree one way or another that change is coming in the form of higher taxation. California’s Proposition 19 will go into effect February 16, 2021. If you have a family business or highly appreciated real estate investment assets, you may want to consider accelerating your estate plan through 2020 lifetime gifts. However, examine such decisions in the context of your overall comprehensive financial plan. Ensure you also understand the non-tax considerations including cash-flow, loss of control, family dynamics and other unique risks. Finally, remember that tax law is notoriously unstable, or jokingly, “tax law is written in pencil.”  The laws today may change again in the future so avoid making a fear-based decision motivated by opportunity loss. Reach out to your Certified Financial Planner™ or Estate Attorney timely if you feel you may be impacted.

The opinions expressed above are solely those of Kondo Wealth Advisors, Inc., (626-449-7783 This email address is being protected from spambots. You need JavaScript enabled to view it. ) a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, Inc. nor its representatives provide legal, tax or accounting advice.


[i] https://www.thebalance.com/exemption-from-federal-estate-taxes-3505630

[ii] https://joebiden.com/two-tax-policies/

[iii] https://taxfoundation.org/joe-biden-tax-plan-2020/#_ftn11

[iv]https://ballotpedia.org/California_Proposition_19,_Property_Tax_Transfers,_Exemptions,_and_Revenue_for_Wildfire_Agencies_and_Counties_Amendment_(2020)

[v] https://www.housingwire.com/articles/how-will-californias-proposition-19-impact-property-taxes/

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2020 Year End Financial Planning

Just as change and uncertainty unnerves people, it’s also one of the biggest triggers for volatility in the stock market.  The stock market hates the risk of the unknown. Therefore, we can imagine the remainder of 2020 to resemble a roller-coaster as we close out a Presidential Election year, battle a global COVID resurgence, and impatiently await the next Federal Stimulus package and availability of the COVID vaccine. That leads many to wonder, what should I be doing now to prepare for the market volatility ahead?

Politics and your Portfolio

The current election call is that Biden wins the Presidency of the United States and Republicans retain control of the Senate. Historically, the divided government scenario plays out most ideally of all variables for the stock market. The divide promotes compromise between the left and the right, and ultimately results in moderate changes. Given Republicans will continue to control the Senate, Biden’s proposal for sweeping tax reform will be reduced significantly. Further, Biden’s experience is seen as ideal for international negotiations, such as the looming trade agreement with China, which is also positive for the stock market.

Investment Check-up

In times of market volatility, the best course of action is typically to stay on track with your overall financial plan. Ensure you’re not taking more risk than necessary in a volatile market, but also be positioned to capture market gains as the global economy enters the rebuilding phase. Diversifying ensures you’re not oversaturated in one market sector that unexpectedly experiences decline, due to COVID, or a subsequent COVID vaccine, for example. A well-diversified portfolio spreads out your risk and allows you to capture gains wherever they emerge. While US Growth performed tremendously in the last decade, we cannot forget the Lost Decade of the 2000s where the same asset class posted a -1% annualized return over a 10-year window. Many analysts predict we might be at the point of a global shift where Value stocks take the lead in the near future. Now is a great time to review your portfolio with your financial advisor and ensure you’re on track as the market rotates. 

Consider Roth Conversions

We are currently experiencing some of the lowest federal income tax brackets in recent history, and likely in the years to come. Further, under the SECURE Act, IRA rollovers must now be distributed by beneficiaries within 10-years from the date of inheritance, triggering income tax that makes the IRS a substantial unintended beneficiary of your IRA. Therefore, if you do not think you will use all your IRA assets during your lifetime or if you have a long retirement ahead, it might make sense to consider converting, or rolling, pre-tax retirement funds into an after-tax Roth IRA. If the market is down, that “sweetens the deal” allowing your investment to grow within and be distributed from the Roth IRA tax-free.

Roth conversions especially make sense for those who would normally be required to take Required Minimum Distributions (RMDs) before proceeding with a Roth conversion. Under the CARES Act, for 2020 only, the RMD can be waived and tax would only be due on the Roth conversion.

Anyone experiencing lower earned income in 2020 due to job loss related to COVID, for example, may want to consider realizing taxable income through IRA withdrawals or Roth conversions they might otherwise have deferred. Keep in mind that anyone who collected unemployment in 2020 may have received payments, tax-free during the year, that will be 100% taxable as income when they file their 2020 tax return next April. Therefore consider setting aside funds for tax-time or making estimated quarterly payments. [i]

Turning Lemons into Lemonade with Tax Loss Harvesting

Loss harvesting is a strategy that allows you to realize, or lock in losses, on an after-tax investment when the stock market is down. By creating a taxable loss with the IRS, you can offset current or future taxable income on gains, or if you have no taxable gains offset taxable income up to $3,000/year. Loss harvesting has several rules and factors that should be considered in advance, so consult your Certified Financial Planner™ or CPA to ensure the strategy can be effectively implemented.

Gifting in 2020

Under the CARES Act, for the year 2020 only, if you itemize deductions, the tax deduction for cash gifts to non-profits was increased from 60% of Adjusted Gross Income (AGI) to 100% of AGI. If a donor gifts more than 100% of their AGI, the excess can be carried forward for up to five additional tax years.

Also under the CARES Act, people who file using the standard deduction can get an above-the-line deduction on charitable gifts. In other words, standard filers will get a direct reduction of income on donations; a benefit that is typically only achieved through Qualified Charitable Distributions (QCDs).  Itemized deduction filers will still need to do a QCD to achieve the desired reduction of income treatment on donations.[ii]

The best financial planning is done throughout the year as both high and low equity markets present unique opportunities. It is also important to note that a long-term investment perspective not only reduces the short-term stress of market volatility but also helps your bottom line return. A prudent investment portfolio should weather anticipated volatility, and ensure your investment strategy aligns with your financial planning goals.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


[i] https://buckinghamadvisor.com/2020-year-end-tax-planning/

[ii] https://www.kiplinger.com/slideshow/taxes/t054-s001-cares-act-expands-charitable-giving-tax-deductions/index.html

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How the election might affect taxes and the stock market

With the presidential election just three weeks away, many of us are on pins and needles, wondering what the next four years might look like! Analysts are already outlining how the election of Donald Trump or Joe Biden will affect future tax policy, health-care reform, COVID response and vaccine dissemination, the pace of our economic recovery and the stock market.  No matter who is elected, the ability to enact sweeping change quickly will depend greatly upon control of the Senate.  There are 23 seats held by Republicans up for election this November, and Democrats only need to flip 3 or 4 seats to take control of the Senate.[i]  If there were to be a Blue Wave, or a Democratic sweep giving the party control of both the House of Representatives and Senate, bold change could come swiftly.

For one, Trump and Biden have very different tax policies. Polls currently show Biden leading in swing states critical for his election. Some analysts feel the stock market is already settling into a Biden presidency and therefore if Biden were to win, this change would have a less dramatic impact on the market which may already be in adjustment. Specifically, Biden’s tax proposal would raise Federal income tax from the current 37% to 39.6% on high earners with income above $400,000 per year. Social Security payroll tax would remain at 6.2% for the first $137,700 of earned income.  However, an additional Social Security payroll tax would be levied on earned income above $400,000.  In summary, for most Americans earning less than $400,000 per year, Biden’s proposed income tax changes would not affect them.[ii] 

Another Biden tax policy change relates to the tax on capital gains realized when equity holdings in non-retirement accounts are sold. Under the current law, investments held for over a year qualify for a preferential Long Term Capital Gain (LTCG) tax rate, ranging from 0% to 20% based on your income.  Biden plans to eliminate the preferential LTCG and instead tax gains on investments at your ordinary income tax rate, no matter how long the investment was held. For example, for a taxpayer making over $1 million of income in a year, their tax on capital gains would increase from 20% to 39.6%.

A third notable tax reform proposed by Biden relates to the Lifetime Gift Tax Exclusion or the estate tax exemption.  Under President Trump, in 2020 an American may pass up to $11.58 million per person or just over $23 million per couple to their heirs, Federal tax free.  Biden proposes to reduce the estate tax exemption to $5.49 million per person or just under $11 million per couple.  The tax exemption limit would be increased annually for inflation annually thereafter.

Finally, the Biden tax proposal aims to eliminate the step-up in basis rule which allows the tax on appreciated assets to be forgiven or eliminated upon the original owner’s death. Currently, the step-up in basis rule allows parents to pass highly appreciated assets, such as their house or stock investments, to their kids tax-free upon the parents’ passing.[iii]  The elimination of this rule would reduce the amount passing to the child since the parents’ original basis will be used to calculate the taxable gain.

From a tax planning perspective, high income earners anticipating bonuses or non-qualified stock options next year may attempt to accelerate the recognition of that income to 2020 if they feel they will be adversely affected by the new laws. Additionally, investors who may be exposed to large taxable transactions such as gain on the sale of a second home or large stock trades might consider closing transactions now while they qualify for preferential Long-Term Capital Gains tax rates.  Anyone affected by the Lifetime Gift Tax exclusion may want to consider estate planning strategies to get assets out of their estate before tax rules are changed.  However, it is projected that many Americans will not be affected by the proposed tax reform, as it stands now. Further, if the Senate remains in Republican control, the actual tax changes enacted may be more moderate, as the tax changes will need Republican approval to pass.

Whoever wins this fall, nearly a century of historical market data has proven that stocks have trended upwards during both Republican and Democratic administrations.[iv]  Presidents do have an impact on fiscal policy such as government spending and taxes. However, hundreds of other factors also play into the market that are outside of the U.S.’ control, such as the COVID pandemic we are currently in the middle of, actions of foreign leaders, technological advances, and so on.  Further, disciplined investors with diversified portfolios are invested in companies, both domestically and internationally, large and small.  Therefore the risks and volatility associated with a portfolio overweighted in one market sector are reduced, making it easier to protect the portfolio during short-term declines and get back on track quickly to capture market growth. Regardless of who is in the White House, companies will continue to focus on serving customers and growing their businesses. Therefore, as long as you keep a long-term perspective and ensure your investment strategy aligns with your goals, a prudent investment should weather the anticipated volatility through the remainder of 2020.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


[i] https://www.270towin.com/2020-senate-election/

[ii] https://www.investopedia.com/explaining-biden-s-tax-plan-5080766#:~:text=The%20Biden%20plan%20would%20impose,base%2C%20currently%20%24137%2C700%20and%20%24400%2C000.

[iii] https://www.cnbc.com/2020/09/08/op-ed-here-are-some-smart-tax-moves-to-make-in-a-biden-presidency.html

[iv] https://www.mydimensional.com/how-much-impact-does-the-president-have-on-stocks?

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The Stock Market Rollercoaster

This week, the U.S. stock market began a new rollercoaster of volatility. For investors who were not fully emotionally-recovered from February and March, this brought back unwelcomed queasiness. Many are wondering how significant this latest market decline is, and what it could indicate for the weeks and months ahead. So far, we are nowhere near the level of declines seen earlier in the year. However this week evoked fears of a Double Dip or a “W” shaped recovery and created a few frightful news media headlines.   

The recent stock market decline was led by drops in some of the largest technology companies, which make up a significant percentage of the current S&P 500 index. Keep in mind it was precisely these tech stocks which soared to all-time highs in our current market rally. In fact, just five companies in the S&P 500 index with average year-to-date (YTD) return of approximately 48% lifted the entire index to break-even territory, despite many companies within the index continuing to be down approximately 5% YTD.[i]  Mid-week, Apple shares fell more than 6%, while Facebook and Amazon were down more than 4%. Microsoft slid 5.4% and Netflix closed 1.8% lower. Alphabet (Google) lost 3.6% of its value.[ii] However, this week’s drop is a small fraction of the 50% rally since the March 2020 low.

Recently, we’ve struggled with the disconnect between the current state of the U.S. economy and the stock market, which has climbed back to record highs. The recent, although brief selloff, appears to be from day-traders who have begun to feel less optimistic or are taking short-term profits off the table. It is impossible to predict if this could turn into panic or if the market will resume its climb.

What we do know is that the unemployment rate is continuing to decrease. The jobs picture has improved for the fourth month in a row. However, that still means roughly 8.5%[iii] of Americans continue to be out of work, which is not good for the overall economic recovery.

We also know that the Federal Reserve Board, is committed to keeping interest rates low through 2021. The Fed is steadfast on the stabilization of the U.S. markets. Congress is currently debating another round of relief for Americans. Although the $500 billion “skinny” coronavirus package did not pass this week, it is believed this could reinvigorate negotiations about a larger $1.5 trillion COVID relief bill from the White House. With the upcoming election, Democrats and Republicans alike would benefit from passing another substantial aid package to Americans in need.[iv]

There is great uncertainty about whether we will see a resurgence in the COVID pandemic.  We have seen South Asia, Australia and Europe successfully stave off a second COVID wave from wide-spread contagion. Further, a COVID vaccine could help Americans get back to “normal” by summer of 2021.

With a November election around the corner, anxiety is at an all-time high, for good reason. Tax reform and the budget for government programs like Medicare and Social Security will be the focus once control of the Senate and a President is determined. It is likely that many or all of these factors will continue to create volatility in the stock market through the end of the 2020.

Investors shouldn’t be surprised if and when the stock market pulls back from our current record highs. If the past is indicative of the future, what we have learned from prior market declines is that the U.S. is resilient. In every instance, through wars, recessions, and even pandemics, the market has eventually recovered from downturns to post new market highs. The next bear market, whenever that may come, should be no different.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


[i] https://www.washingtonpost.com/business/2020/08/19/tech-stocks-markets/

[iii] https://www.bbc.com/news/business-54029361

[iv] https://www.cnet.com/personal-finance/gop-covid-relief-bill-fails-in-senate-next-steps-for-stimulus-package-and-check/

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EDUCATIONAL WORKSHOPS

2021 SCHEDULE 

 

INVESTING: WHAT TO EXPECT IN 2021

Saturday, January 23, 2021

9:00 a.m. – 11:00 a.m.

Zoom Webinar

(Zoom link to be emailed upon RSVP to info@kondowealthadvisors.com)

 

 

 

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