Income Taxes - new to the game don't get it

mdeleonMarch 6, 2007

Well, my mother always took my stuff in the past.. .But now that I'm married and starting off my career and making more money, I'm totally confused. We file married and jointly. How do I know what tax bracket I'm in and what does that essentially mean? I think I'm in the 25% bracket (assuming we combine our incomes). Does that mean 25% of my paycheck goes to uncle sam? Or is it weird where 15% of the first 10,000 or whatever is? I am just confused. I am also confused how taxes are taken out of your paycheck automatically YET, you could stil OWE money... To me, that sounds like the government just has a bad calculator. Argh..

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Hello Mdeleon,

Have you ever looked over a tax return?

I suggest that you do.

Get your Mom, or some other knowledgeable person that you know, to explain how it works. When you don't understand something, ask how it works.

The amount withheld from paycheque is a rough estimate.
Different people have different deductions, credits, etc. that vary the amount actually owed- which means that you may get some back, as too much was withheld, or maybe it was not enough, resulting in you getting to pay more after your calculations are made.

If you have very small income, probably be required to pay none, largely because everyone has certain deductions and credits. With somehat larger income, you pay at a crtain percentage on the income over the base amount. At a higher income level, you pay at the lower rate on a few thousand over the no-pay amount, then pay at a higher rate for several thousand above that.

It's important to learn how the tax system works.

For a number of years I operated as a personal financial advisor, and I asked some tax preparers whether, when they'd finished preparing someone's tax return, a number of the clients asked what changes they might make during the upcoming year to arrange their affairs so as to reduce their tax load for next year.

Almost all of them said that no one asked such questions.

I found that amazing: when someone prepares my tax return, they learn quite a bit about my business, and possibly could help me rearrange my affairs slightly so that I could manage it well but avoid some taxes that I'm paying now.

A couple of years ago, a Canadian taxpayer with only one source of income could, by using some deductions and non-refundable tax credits, earn about $30,000., if it were totally dividends paid to owners of stocks in Canadian corporations, and pay no income tax.

Last year, due to setting up a different method of calculation, that amount grew to upwards of $50,000.
If one had a bunch of stocks that pay 3% dividends, that'd take about $1,666,000.

But quite a few companies pay less, and a number of stocks pay none at all - so we/re probably talking 3 - 5 million or so investment to produce that amount of dividends.

Learn how money works - it's a great hobby ...

... and ***it pays well***!!!

Nobody cares about your money as much as you - except someone that'd like to shift some of it from your pocket ...

... into his/hers.

Do you know what rate of interest you pay on balances owing on your credit card after the due date?

If it's a regular card, about15 - 18%, usually, but if it's a store-issued card, more like 25 - 28%.

If you'd paid off the balances by due date earlier, but this year began to leave balances owing over a period ...

... you just guaranteed a reduction in your effective income, next year - you'll have to shift some of that income from buying stuff for use then to paying interest on the money that you borrowed to buy stuff this year and haven't yet paid.

If you don't learn how to boss your money (and do it) - your money'll boss you. And you won't like that.

Don't let it intimidate you.

Get some advice at the library as to some useful books to get started, and check them out, then progress to more complicated stuff.

Know what? Using money more effectively, and finding ways to reduce your tax load, will be the equivalent of gettting a raise in pay.

The goverment seems quite capable of taking care of their fairly wealthy friends!

Good wishes as you start out on the adventure of learning how money works - and how the tax system impacts it, in many ways.

ole joyful

    Bookmark   March 6, 2007 at 4:31PM
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It's great that you decided it's time to learn about your taxes! Talk to some friends and get the name of a good tax preparer who would be willing to explain each line on your return and how taxes work. You have lots of questions and the answers are going to vary widely based on where you live, what incomes you have, what kinds of deductions you may claim, etc. Once you have an understanding you might then decide if you want to tackle doing your own taxes. For now though you might very well miss out on some deductions since your not at all familiar with taxes.

    Bookmark   March 6, 2007 at 4:52PM
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Tax rate is like stair steps that you climb. The first step is for the first 15,100 of your income, the second step is the next (61,300 - 15,100 = 45,800) of your income so on and so on.

Schedule Y-1 Married Filing Jointly or Qualifying Widow(er)

The tax is:
$0 $15,100 10% of the amount over $0
$15,100 $61,300 $1,510.00 plus 15% of the amount over 15,100
$61,300 $123,700 $8,440.00 plus 25% of the amount over 61,300
$123,700 $188,450 $24,040.00 plus 28% of the amount over 123,700
$188,450 $336,550 $42,170.00 plus 33% of the amount over 188,450
$336,550 no limit $91,043.00 plus 35% of the amount over 336,550

You pay taxes on your taxable income. You taxable income is your total income from your "work" and "earnings" minus deductions. There is "standard deductions" that the government allows you if you do not itemize on the taxes. The more kids you have, the higher the standard deductions. If you chose to itemize your tax return, there are certain things that are allowed by the government that reduces your taxable income. The most common deduction is your mortgage interest.

Tax witholding from your paycheck is determined by what you chose as your exemption on your W4. If you read the fine print on the form, there is a work sheet that helps you to determine what the "exemption" should be so that at the end of the year, you will not owe very much money. In general, the more exemptions you claim, the less money the payroll department will take out of your paycheck. So if you want to get lots of money back, you claim "0" or "1". If you want to pay at the end of the year, you claim more, 4,5,6 etc. Hoever, the total amount per year you pay is the same, which ever way you chose because the total amount of tax owed is based on your tax rate, income and your deductions.

Most tax preparer will not spend the necessary time to explain everything from the beginning. You will have to pay for their time if you want to use alot of their time.

I suggest finding a friend or family that can help you understand the basics of tax preparation. You don't have to know how to do it, but you should have the basic knowledge.

Alot of learning new things is to learn new words/jargon/lingo/terminology related to that particular field. For example, there are very specific meanings for the words "exemption" "income" "taxable income" "deductions" "depreciation" "deferred income" when it comes to taxes. Some are obvious and others are more difficult. Forget about the numbers first. Focus on learning the ideas and concepts first, then it will be easier to crunch numbers later.

Good luck.

My dad taught me how to do the taxes the first year I filed. I think I was 14 or so. It was a great lesson and I still appreciate what he did.

    Bookmark   March 6, 2007 at 5:46PM
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My wife and I are employees at the same company. Last year we both filed our W4's as married (filing jointly) and claimed zero so we wouldn't have to worry about paying at the end of the year come tax time. I finished figuring our taxes and we still owe over $2000 for federal and over $1000 to California... What could we have done wrong? If our company isn't witholding enough out of our paychecks should we figure it out on our own and use the Schedule Y-1 (above) so enough is witheld? We don't have a mortgage, kids, or anything other than the standard deductions... It should be straightforward. Isn't claiming zero the right thing to do in our situation?

    Bookmark   March 7, 2007 at 1:51AM
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"... Most tax preparers will not spend the necessary time to explain everything from the beginning. You will have to pay for their time if you want to use alot of their time ..."

Actually most tax preparers love to talk about taxes and answer questions!

Also most tax preparers bill according to the forms used and NOT the amount of time spent with a client.

    Bookmark   March 7, 2007 at 1:59AM
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Everyone's taxes are different. The right thing to do, now that you've figured out your taxes, is to divide that total amount by the number of paychecks you get and have that specific amount withheld. That way you should have just about enough to cover next year's taxes without underwithholding, or without making Uncle Sam a big interest-free loan. There's no magical way that going for zero exemptions will automatically align with your bottom line of taxes owed, and you're in the worst situation possible: married with no children, no itemized deductions, and both of you probably earning decent salaries. Unfortunately for you, the way the tax code works, people like you are subsidizing the rest of us. Have some kids, buy a house, and get a divorce and live together: I guarantee your tax situation will improve a lot!

    Bookmark   March 7, 2007 at 3:19AM
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Chemocurl zn5b/6a Indiana


What could we have done wrong?

Do you have any other taxable income? such as interest? dividends? Rental income? Anything else? If you do, that 'could' be the problem.


    Bookmark   March 7, 2007 at 10:25AM
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Hey Kudzu,

I thought there was a lot of talk at the beginning of the Bush administration about getting rid of the marriage penalty. Was that never done?

    Bookmark   March 7, 2007 at 10:41AM
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You should go to a CPA and have your taxes done at least once. This is different then a tax prepearer. My fiance is a CPA and owns here own company. She loves to explain to her clients line by line what it all means. If you go to a company like H&R block, most of those peple just take a class in the evening for a few weeks and then can work for H&R block. My sister did this. She works at a hair salon during the day. As far as fees go, she charges by time not the documents. Some people just bring in a shoe box full of reciepts and want the income taxes done. It takes time to go through all the documents and and things up. If she were to charge by the document it would not be fair.

    Bookmark   March 7, 2007 at 12:16PM
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Form 1040-ES (Estimated Tax) is available for download in .pdf format. Purpose of it is to do an estimate of one's projected YEARLY tax bill, and then divide that by 4 to make quarterly ESTIMATED payments. It has what *should* be the correct tax tables for the fiscal year in question. Being as one's income may change a little through the year, the estimate is exactly that, an *estimate*. However, for many years now I've run a spreadsheet each year on which I list my salary by pay period, along with interest income, dividends, etc - projected at first, corrected as it accumulates through the year. Deductions (columns for both standard and itemized to figure it both ways), and withholding from each paycheck. Tax rate tables from Form 1040-ES. The bottom-line figure comes out pretty accurate, except for variations on items that are harder to estimate such as capital gains distributions which aren't known until they occur. I can adjust the bottom-line total by changing the withholding from my checks. Most employers will oblige changing it a few times per year. Personally, I prefer to OWE a small amount. A refund means I paid the Gubbermint too much and they got FREE use of my money.

    Bookmark   March 7, 2007 at 12:39PM
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mrptb, I agree with dadoes

Depending on your income, you may have to have the company withold extra money in addition to 0 exemption or pay additional estimated taxes.

I prefer to pay extra money I owe at tax time rather than get a rebate. I would rather that I get a bit of interest than the government. It's just a difference in the tax philosophy. The total tax burden is the same either way.

However, if you end up owning a large amount, IRS charges you interest and penalty on the amount owed.


I am not sure where you need to start on your financial education and tax education. I have the feeling that you need to start from the basics and will take a pretty significant time committment on your part and on your teacher to get on a comfortable level with the taxes.

Most professionals cannot spend more than 10 to 30 min with you unpaid. This includes the doctor, lawyer, CPA, financial planner, etc. If they are selling something and can spend alot of time with you, then they are sales people, not professionals. They may give you a good education on their area of expertise, but it will be biased. But then, everyone has their own paradigm that they work from and are biased.....

For most professionals, their time spent for/with the client is their income. If they are spending many hours with you unpaid, they have to make up that time somehow.

If they are charging someone else, they are dishonest.
If they are charging you, it will be an expensive hourly rate.
If they are not charging anyone for many hours of consultation/education offered to their clients, they are bad business people, or underpaid, or their basic rate is expensive to cover for it.

However, I may be completely wrong and that 30 minutes with a good teacher is all you need to get your questions answered.

This is just my opinion.

Good luck. I think if you are interested, it is not that difficult to learn the basics of the taxes. Go and learn and take control of your finances. You can do it!

    Bookmark   March 7, 2007 at 4:56PM
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mdeleon, the government does not have a "bad calculator", if you end up owing money. For example: if one had a low paying job, but had invested in stocks in the 1990's, one might have owed the government a lot of money due to capital gains. The witholding allowance sheet that was filled out at the workplace would have had no way of predicting this. It's up to an employee to make adjustments to his/her witholding.

Kasimom's comment about owing money being preferable is spot on. Many taxpayers are so "happy" to get a big refund.
What they forget is that they've made Uncle Sam an interest free loan. That's not something to be happy about.

    Bookmark   March 7, 2007 at 6:11PM
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Last I heard, Uncle Sam was sort of needy.

What with all of those tax cuts that were made a while ago.

And borrowing more money to make them, some say.

In addition to all that which he owes already.

Poor ole Uncle Sam is darn near broke.

Needs all of the income that he can manage, doesn't he?

ole joyful

    Bookmark   March 7, 2007 at 6:34PM
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When first doing my own taxes, I found it best to start by organizing pertinent records for that tax year:
All income from all sources (W-2s, 1099s, etc)
All taxes (including state and local) paid in that year
All other possible deductions
Then, going through the 1040 instructions, line by tedious line, I filled in the form. (1040 EZ, actually, until I could deduct mortgage interest)
After going through it like this a couple of years, you won't find it near as daunting, though it can still be tedious at times.
I found Publication 17 (free from the IRS) to be invaluable in educating me on what should or could be reported. It's also a good reference for many other questions and situations affecting your taxes.
As for your tax bracket, I guess it depends on how you want to view it.
Are you interested in the percentage of your total (gross) income that goes to Uncle Sam, or the percentage of your taxable income? Perhaps you want to know the largest incremental percentage that you pay (as described above by kaismom). Personally, I look at the first number for a guide as to how much to have withheld so I don't get a refund check and even owe a few dollars on April 15th.

    Bookmark   March 7, 2007 at 8:29PM
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Look for a tax preparation person who is a CPA. Without any deductions, you probably will have to fill out a short form. After tax season is over, then make an appointment with someone to prepare yourself for next year, as they will have more time to discuss it with you. Make sure they are a CPA and available year around.

    Bookmark   March 7, 2007 at 10:37PM
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A couple of years ago Congress made some very modest changes to the factors affecting the so-called marriage penalty, but it's still alive and well. These little changes probably resulted in a couple of hundred bucks less in taxes for some couples. However, the reality is that they couldn't afford to do away with most of the marriage penalty because it brought in so much money. After all, Cathleen, it wouldn't be fair to expect the very wealthy to give up all of their new tax breaks just so middle class Americans could have some tax relief, would it?

I know a couple who have remained unmarried because of the marriage penalty. They estimate that they have saved between $3,000 and $7,000 per year in taxes for over 25 years by living together and filing separately as singles, compared to being married with the same income.

    Bookmark   March 8, 2007 at 1:15AM
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Don't forget if you live in a State where there is no State Income Tax you can take the "sales tax deduction" again this year

    Bookmark   March 8, 2007 at 6:04AM
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My, my, my! What is with all the recomendations for CPAs?

Mdeleon, it is really very easy to do your taxes. The IRS makes a nice booklet that walks you through it quite nicely. If you are newly married and starting your career, I would bet you have very little to calculate. Did you get some tax forms (a 1040 booklet, a 1040EZ booklet) in the mail? If you did, open it up and start reading. It is written at about the 7th grade level, so most people do fine. If you run into words that you don't understand, there is always on the web.

Get your W2s together -for both of you. Are either of you self-employed? If so, you get a 1099 instead of a W2. Get any statements about bank interest earnings, or other types of unearned income together. I bet you don't have much of that, at your stage in life. Do you own a home? If yes, get out the statement that the mortgage company sent you. Basically, get out anything that said "Important Tax Information" on the envelope.

Read the form, fill in the blanks. Go to for questions. Add. Subtract. Write a check or fill in the blanks for getting your refund direct deposited. Sign the form. Attach the w2s or other forms. Put it in an envelope and lick the back to seal it, put on a stamp and mail. If you do it online, it saves the writing and math and mailing and you get it done in a half hour, I bet. If you REALLY feel the need to learn about taxes, buy tax software and read all the little pop-ups and such. It is REALLY REALLY EASY to do taxes for wage earners with only houses and savings accounts. It is not too hard to do taxes if you have IRAs and dividends from stocks and such. It is a bit of a pain if you have a small business or earn 1099 income as a contractor - but it is still not at all difficult.

I look at it this way - Signing that tax form means that you understand how your taxes are prepared and what decisions were made in filling in the blanks for what reasons. You must sign the form to mail it, or do a similar kind of pledge that you stand by the tax return if you do it electronically. If you have to swear to this anyway, then do the taxes yourself and really understand the process. Why trust someone else with no more education than you have to do it at H&R Block? Or use the tax software and just answer the questons as they come up. It ain't rocket science and you will feel a great sense of taking care of your own business when you finish.

    Bookmark   March 9, 2007 at 12:54AM
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"I look at it this way - Signing that tax form means that you understand how your taxes are prepared and what decisions were made in filling in the blanks for what reasons"

Not really. Just because you enter numbers in a space does not mean you know what your doing. This is why suggest going to a CPA at least once so they can tell you what the numbers mean. They can also tell you what deductions you can take and SAVE you money. Everyones tax situation is different as far as write offs and deductions. You wouldnt believe the stories I hear from My fiance that is a CPA about reviewing new customers old tax returns.

    Bookmark   March 9, 2007 at 2:06PM
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Learning how money works - an interesting hobby ... **that pays well**!!

Learning how taxes work ... more of the same as the above.

Tax evasion gets one into fairly deep trouble.

Tax avoidance is an important task that should be practised by every taxpayer.

After all - you wouldn't throw money down a rat-hole ...

... unless it were necessary, even essential, would you?

ole joyful

    Bookmark   March 9, 2007 at 8:00PM
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Good advice Nancy in Mich, the goal should be to learn in detail for the future about taxes. You can also get the J K Lasser tax guides, there are many guides, but I like that format. It will help you to keep learning so you can do tax planning in the future. Going to a CPA for a limited visit is too short to comprehend taxes, spending more than a limited visit with a CPA is a waste of money for a person with a simple return. You can learn over time, all the ins and outs of taxation, and as joyful touched on, practice that important art of tax avoidance.

    Bookmark   March 10, 2007 at 11:46AM
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I'm going to add a little wisdom here based on my experience. I've been a tax preparer for 14 years, completed over 3500 returns, and taken more than 500 hours of training. I've had experience with various types of tax organizations. Deciding who to go to to prepare your taxes can be confusing. Let's change that! Here is an explanation of the differences of a CPA, tax preparer, and an EA -- and -- some information about how each of them work. I hope this will help you pick the one that best works for you!

~ An Enrolled Agent (EA) is a designation by the IRS that the individual has passed a knowledge exam on taxes that allows the EA to represent a taxpayer infront of the IRS. An Enrolled Agent may be a tax preparer or a CPA. Not all tax preparers or CPA's are Enrolled Agents.

~ A CPA is Certified Public Accountant. They received this designation by passing knowledge exams on numerous accounting areas. Many CPA's specialize in a specific area of accounting. If you go to a CPA make sure they specialize in taxes. Not all CPA's specialize in taxes or are Enrolled Agents. The CPA must be an Enrolled Agent to represent you infront of the IRS.

~ Tax preparers are trained to prepare taxes. Often they have a educational background or work in accounting but not necessarily. Their knowledge varies based on the number of years they have prepared taxes and educational courses they have taken. Tax preparers at H&R Block begin with a basic training course of 66 hours of class time plus additional hours for updates on new tax law changes and on-the-job training hours. Students of the basic training course must pass a final exam to qualify to work for H&R Block. Experienced H&R Block tax preparers are required to complete a minimum of 30 hours of training each year plus additional hours for updates on new tax law changes. Many tax preparers at H&R Block and smaller tax prep firms are Enrolled Agents.

~ H&R Block charges are determined by the forms used and what is filled in on the form. If you require H&R Block to do bookkeeping (you know that brown bag of receipts) they will charge an additional hourly fee.

~ Most CPA's charge on an hourly basis. From my personal experience the cost of going to a CPA is about 2X the cost of going to H&R Block. Some local firms are even less but may not have an EA or year-around office to help if there is a problem.

~ If you go to H&R Block you will sit with a tax preparer as they prepare your return. The preparer will ask lots of questions, answer questions, and make suggestions for future tax savings. Unless there is a complex tax issue that needs to be researched or missing information, the preparer will complete your return while you are there and you can take it with you when you go.

~ If you go to a CPA they may have you sit with them as they prepare and complete your return -or- they may just have you leave the tax information and call you to pick-up the return when it is completed.

~ Many CPA's hire tax preparers such as myself (often current or former H&R Block preparers) to complete the return. The CPA reviews the completed return and signs it as the preparer and presents it to the client. This is very common in our area especially with larger accounting firms.

~ Tax laws are complex and change each year. I've amended returns prepared by individuals, H&R Block, other tax prep firms, and CPA's. Anyone preparing your return can make a mistake.

~ If you prepare your own taxes on-line be sure to print a copy for your records. The on-line programs are great for simple returns (such as those with just W2's and interest).

~ If you want to purchase tax software Turbo Tax and Tax Cut are the most popular. Be sure to print a copy of your return for your records. The software is a great choice for a return that is not complex and if you are willing to take the time to research items that you are not sure of.

~ If you choose to go to H&R Block or a smaller tax firm call and request an appointment with an experienced preparer and let them know you would like a preparer that will spend time reviewing and explaining your return in detail. They will schedule you with a preparer that meets your needs if they know when you call for an appointment.

~ To find a good CPA or tax preparer ask friends and family for recommendations. Ask them why they like their preparer and see if it matches what your looking for. If you find a someone you like then call next year to schedule an appointment specifically with that person.

As for the original poster ... from her explanation they have a rather simple return. If she felt confident to do her own return she could go online and do it. It sounds as though she wants to learn but would like some help this year so going to a professional might be a good idea. Since the return seems to be rather simple I think an experienced tax preparer would be less expensive than a CPA. I'd suggest calling for an appointment in advance and requesting that the appointment be scheduled with an experienced tax preparer that will be willing to answer lots of questions.

    Bookmark   March 11, 2007 at 4:35AM
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Excellent post, Liketolearn. I am an ex-Blockhead and am now working for a small independent tax prep firm. We are open all year for questions or whatever you need done.

I would like to add 2 things to Liketolearn's post.

First, you the taxpayer are ultimately responsible for the information that is used to prepare your return. If your information is inaccurate or incomplete, then your return will be inaccurate or incomplete. You can go to a CPA who is an EA with 40 years of experience and your return will still be wrong if the information you provide isn't any good.

You, the taxpayer, should understand your return no matter who prepares it. If you choose to pay someone else to do your return, you should go over it line by line before signing it. If you don't understand a line item or how something was handled, then you should ask. All preparers are human and can make mistakes - even the CPA-EA with 40 years of experience.

Second, if you choose to prepare it yourself, you still need to look at the return and check it for accuracy and reasonableness. I and every other paid preparer have seen some pretty obvious mistakes on tax returns prepared using any and all of the software programs. Most people should be capable of preparing a tax return with a Schedule A. Personally, I think no one should be allowed to graduate from high school without understanding how to complete a 1040EZ.

Using tax software does NOT elminiate the need to occasionally open the IRS pubs. While there is much good information here and on the various boards, I wouldn't prepare a return based on something I read on the internet. Pull the pub up and read it for yourself. Most of the pubs are very readable.

Jumping off my soapbox now.

Good luck all.

    Bookmark   March 11, 2007 at 3:41PM
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