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Tax implications for recent L1-A arrival: Advice and recommendations?

Tax implications for recent L1-A arrival: Advice and recommendations?

Old Jul 17th 2023, 1:43 pm
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Default Tax implications for recent L1-A arrival: Advice and recommendations?

Hello everyone,

I've been reading these forums and have found a wealth of knowledge here - I am looking forward to being a part of this community. However, I am beginning to feel a little overwhelmed and am reaching out for some advice and possibly some recommendations for a professional advisor.

I recently moved to the US on an L1-A visa, starting my new role here on the 1st of June. I plan to be here for at least a couple of years but that could extend further eventually, as my partner is a US citizen (the main reason I moved here).

Prior to moving, I was living and working in the UK. I have a stocks and shares ISA with some mutual funds back home, and a couple of pensions, but the majority of my assets are currently sitting in high-interest savings accounts, a situation that came about following the sale of my flat before leaving the UK.

I was in the process of planning how best to allocate and invest these funds when I came across information about FATCA and FBAR. I've been trying to understand the implications, especially in terms of reporting requirements for pooled investments held abroad, and the tax implications given that a UK ISA doesn’t shield me from US tax.

I've calculated my days spent in the US over the past 3 years, including numerous trips on an ESTA before my L1-A visa, and it seems I am below the threshold of the 'Substantial Presence Test'. So, I don't believemy global income is currently a factor, but I'm not 100% sure and this will of course change over time.

I'm sure that I'm not the first person in this situation, and I absolutely want to do the right thing. I'm just unsure about what exactly that might be. So I am reaching out to this community: has anyone been in a similar situation or could point me in the right direction? Does anyone have any recommendations for professional advisors who specialize in UK-US tax situations?

Any advice or suggestions would be greatly appreciated. Thanks in advance for your help.

Last edited by Andersoc; Jul 17th 2023 at 1:47 pm.
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Old Jul 17th 2023, 1:57 pm
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Default Re: Tax implications for recent L1-A arrival: Advice and recommendations?

FATCA/FBAR is not a big deal, you just list out the accounts on a form once per year. If you moved on an L1-A presumably your work will also pay for an accountant for the first 1/2 years (in any case FBAR is easy - tax may be more tricky).
However, the main thing you need to be aware of is PFIC rules. Search for these rules and then immediately sell all your funds in the UK. The US will tax you to oblivion and cause a lot of very complex filing requirements. As long as you are a US person (living here or if you get a green card or citizenship) do not hold mutual funds or similar investment vehicles which are not US funds.

If you are likely to move back to the UK long term without a green card or citizenship then it might be useful to maintain some funds within the ISA wrapper especially if it is a large amount (several years+ of max contributions). However, you would need to put that money either into cash or into single stocks while you are a US person. You will need to consider if the benefit of having the tax-shielded funds in the future is worth putting them in sub-optimal investments in the meantime (and the US will of course tax income or capital gains from the ISA while you are a US person).
If your partner is a USC, it might be relatively unlikely that you return to the UK without a green card or citizenship, and therefore it will be easiest to just sell everything, move it to US investment account.
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Old Jul 17th 2023, 4:25 pm
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Default Re: Tax implications for recent L1-A arrival: Advice and recommendations?

These posts may help you get started with your fact finding and research.

This one might help to get a broad understanding of the issues:
​​​​
https://britishexpats.com/forum/usa-57/just-moved-us-uk-isa-pfic-rules-943631/


This one might help with potential solutions and the way forward. Pay particular attention to Post #7 and #10 and the Inbound Transition Rule comments within this post.

First Tax submission in US (California): Chaos!

In any case make sure you comply with all foreign reporting requirements immediately on your first tax return. Fixing non compliance after the fact is very time consuming, can be extremely expensive, and in the worst case scenarios financially crippling. They do not cut any breaks for not being aware of, or not understanding the requirements, or for thinking they did not apply to you for any reasons whatsoever.

In your case depending upon the aggregate total of all your investments you will need to be aware of the requirement to annually file Form 8938 with your tax return, and an FBAR, both subject to thresholds which you may or may not exceed. Lots of good information on the internet. Understand that every foreign asset should be reported and that includes life insurance, pensions, bank accounts, shares, mutual funds of any kind, ISAs of any kind, etc. Pretty much the only foreign assets that do not need to be reported are property and collectibles like art work. https://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html and https://www.irs.gov/forms-pubs/about-form-8938 will help you get started.

With regard to your foreign mutual funds research the situation as fast as you can and manage the situation without delay. They are very bad news for any US person, with draconian taxes, and unbelievably onerous reporting requirements. Start with the above links, research PFICs (which is what the US calls foreign mutual funds) and take a look at Form 8621 to get an idea of the reporting requirements, and remember it is one for every fund, every year. Try completing one! Then ask any questions you need to after that. https://www.irs.gov/forms-pubs/about-form-8621

On another issue, I believe only the global income received on or after the day you entered then US on your L1 visa will be taxable by the US, and of course you will get credit for any tax paid to the UK on that, so that should not be a big concern.

Last edited by Glasgow Girl; Jul 17th 2023 at 4:44 pm.
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Old Jul 18th 2023, 2:08 pm
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Default Re: Tax implications for recent L1-A arrival: Advice and recommendations?

Thanks both for your thoughtful replies and for taking the time, it is very much appreciated.

So to try and summarize the main points:
  • Accountant: My company has not provided one - we are fairly small and haven’t done many US transfers. I’ll ask them for recommendations, but does anyone have tips on getting started looking for reputable firms?
  • Options:
    • Keep in UK - Sub-optimal investments (e.g. cash and single stocks): This doesn’t seem worth the restrictions.
    • Keep in UK - Onerous reporting: I have one ISA of £70k all invested into the same fund, but liquidation still seems the easier option.
    • Liquidate and transfer everything: I naively didn’t expect to have to do this but, such is life! I am sure there are some great threads on the most efficient means for this.
Given everything I think my current plan is:
  1. Understand the current status / obligations around my UK ISA (and other holdings):
    • There is an added complication. Originally, this was £50k held in the same Vanguard mutual fund. I only recently (while in the US…) decided to use this year’s £20k ISA allowance, sell the £50k of mutual fund and buy £70k of an ETF. Given I had held the the Vanguard fund for so long, I’m not entirely sure whether I realised a gain or a loss.
    • I think this situation may (negatively) impact my ability to use the Inbound transition rule for MTM election idea?
    • I believe I am currently classified as a ‘nonresident alien’ as my tenure here is below the ‘substantial presence’ threshold, meaning I am (currently) only taxed on my US income. This will of course have changed by the time I need to file my tax return next year. But, as part of this tax return, do I need to include all global activity from: 1. The start of the year 2. My entry to the US on the L1-A visa 3. The date on which I became a ‘US person’ / ‘resident alien’ for tax purposes (which will be later in the year)? While writing this comment I found this, which indicates I would file separate returns for when I was a nonresident vs resident (I am too new to this forum to post URLs, search for 'taxation of dual-status aliens'). Would appreciate any thoughts on whether my interpretation here is correct?
  2. Find the most efficient means to liquidate and transfer my UK holdings.
  3. Figure out the most tax-efficient structures etc. here to reinvest.
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Old Jul 18th 2023, 3:41 pm
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Default Re: Tax implications for recent L1-A arrival: Advice and recommendations?

For sure the best course of action is liquidate the current foreign funds. Whether you invest in individual stocks and/or bonds to preserve the ISA benefits without the PFIC reporting requirement would be trading lower returns against the possibility of returning to the UK in the future and benefiting from the tax free ISA benefits. Unless you really think you might go back before you ever want to access those funds, I would transition into US funds. The Capital Gains Rate is only 15% (plus state taxes) and unless you are a pretty high earner the better returns will likely go a long way to cover those taxes.

The person I used to navigate this minefield is no longer available, so I cannot personally recommend anyone, but I may have some information on one or two of the better international advisors that really understand these issues, and charge reasonable fees. If I can find that information I will post it, but it will take some time to dig out, so nothing soon.

Because you will have been in the US for more than 183 days at the end of 2023, for tax filing purposes you will be considered a resident alien, RA, on the date you entered the US on your L1 Visa, and a non resident alien, NRA, prior to that. In practical terms that means you will pay IRS tax on all worldwide income from the date you became an RA, and only on US sourced income for any earnings prior to that.

Because you sold funds in the period in which you will be considered an RA that means you will have to pay the IRS tax on the sale of your £50K Vanguard funds, and on your ETFs if they are now sold. Losses cannot be deducted on foreign funds or offset against profits on domestic funds (another reason not to keep such entities). However, I am pretty sure you can net profit and losses on the sale of foreign funds so if you make a profit on one of the sales and a loss on another, you only have to pay tax on the net profit (if any).

I believe the Inbound Transition Rule is still available to you, but remember that will only limit your profits subject to PFIC taxation, you will still have to pay capital gains on the portion of the profits not given the stepped up basis by the Inbound Transition Rule, but that will be at the normal capital gains rate which is far better than the PFIC tax. Plus, since you are only here for a partial year, you could find that the capital gains rate is 0% on some of those profits (depending upon your total income).

Liquidation of your ETF is easy. Sell it and transfer the proceeds over here when you are ready. Wise.com provides excellent exchange rates and is easy to use, but requires a verified account, so perhaps set that up in advance. There are of course other exchange services but Wise is up there with the best of them. I can personally recommend them.

The most tax efficient vehicle to invest in here will be a 401K if your firm offers one, and/or a Roth IRA and/or a traditional IRA. Different pros and cons depending upon your personal situation but lots of information on that on the web. You can do all three subject to annual limits. You won’t be able to invest it all in one year, but could do so over several years.
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Old Jul 18th 2023, 5:48 pm
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Default Re: Tax implications for recent L1-A arrival: Advice and recommendations?

Thanks Glasgow Girl again for your very detailed reply. Some great advice in here but I wanted to focus on this aspect for a minute:
Originally Posted by Glasgow Girl
Because you will have been in the US for more than 183 days at the end of 2023, for tax filing purposes you will be considered a resident alien, RA, on the date you entered the US on your L1 Visa, and a non resident alien, NRA, prior to that. In practical terms that means you will pay IRS tax on all worldwide income from the date you became an RA, and only on US sourced income for any earnings prior to that.
This part I'm incredibly anxious over - what is / will be the 'start date' of my being a 'resident alien' for tax purposes?:
  • Your perspective above is from the moment I enter on the L1-A, which seems reasonable.
  • Other sources I've read are the date upon which I exceed the 'substantial presence test' threshold. This intuitively feels more 'fair' (but tax affairs can be far from fair).
  • Most shocking however, I just read a page on the IRS website entitled 'Residency Starting and Ending Dates' (I am not able to post URLs unfortunately), which states: "If you meet the substantial presence test for a calendar year, your residency starting date is generally the first day you are present in the United States during that calendar year.". I was in the US 1st January this year to spend NY eve with my partner. Unless the word 'present' implies 'not a visitor / on an ESTA', I'm now pretty anxious.
Do you (or anyone reading) have any insight into calculating residency dates? And yes if you do find the details of anyone recommended, I would be most grateful.
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Old Jul 18th 2023, 6:01 pm
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Default Re: Tax implications for recent L1-A arrival: Advice and recommendations?

Originally Posted by Andersoc
Thanks Glasgow Girl again for your very detailed reply. Some great advice in here but I wanted to focus on this aspect for a minute:


This part I'm incredibly anxious over - what is / will be the 'start date' of my being a 'resident alien' for tax purposes?:
  • Your perspective above is from the moment I enter on the L1-A, which seems reasonable.
  • Other sources I've read are the date upon which I exceed the 'substantial presence test' threshold. This intuitively feels more 'fair' (but tax affairs can be far from fair).
  • Most shocking however, I just read a page on the IRS website entitled 'Residency Starting and Ending Dates' (I am not able to post URLs unfortunately), which states: "If you meet the substantial presence test for a calendar year, your residency starting date is generally the first day you are present in the United States during that calendar year.". I was in the US 1st January this year to spend NY eve with my partner. Unless the word 'present' implies 'not a visitor / on an ESTA', I'm now pretty anxious.
Do you (or anyone reading) have any insight into calculating residency dates? And yes if you do find the details of anyone recommended, I would be most grateful.
You can become tax resident as a visitor or even an undocumented/illegal alien…. IRS is only focused on collecting tax…

I can’t remember how it worked back in 2010 when I moved here on my L1a, but remember an IT-203 for NYS which is part year resident. And yes the count of days is that, a count of days regardless of status. But it is likely more complex than that, and don’t forget the DTA and credit tax’s paid. One note here is that only applies to Federal tax’s so I ended up with a large credit I could never use and paying additional state and city tax out of pocket… had some very expensive years because after I lived here I ended up commuting to London for work for a another few years.
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Old Jul 18th 2023, 7:19 pm
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Default Re: Tax implications for recent L1-A arrival: Advice and recommendations?

Originally Posted by Andersoc
Thanks Glasgow Girl again for your very detailed reply. Some great advice in here but I wanted to focus on this aspect for a minute:


This part I'm incredibly anxious over - what is / will be the 'start date' of my being a 'resident alien' for tax purposes?:
  • Your perspective above is from the moment I enter on the L1-A, which seems reasonable.
  • Other sources I've read are the date upon which I exceed the 'substantial presence test' threshold. This intuitively feels more 'fair' (but tax affairs can be far from fair).
  • Most shocking however, I just read a page on the IRS website entitled 'Residency Starting and Ending Dates' (I am not able to post URLs unfortunately), which states: "If you meet the substantial presence test for a calendar year, your residency starting date is generally the first day you are present in the United States during that calendar year.". I was in the US 1st January this year to spend NY eve with my partner. Unless the word 'present' implies 'not a visitor / on an ESTA', I'm now pretty anxious.
Do you (or anyone reading) have any insight into calculating residency dates? And yes if you do find the details of anyone recommended, I would be most grateful.
The bad news is that you are correct that it is the first day you are present in the US which would be Jan 1st, given what you mentioned about being here on New Years Day, albeit on holiday. The good news is that if you were here for less than 10 days (hopefully that is the case) then you can ignore up 10 days before you entered based upon your L1 visa. They call that a de minimus exception. See this IRS publication, page 7, First Year Of Residency, is the magic bullet. The rest of the document may help you as well. Probably worth a read. https://www.irs.gov/pub/irs-pdf/p519.pdf
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Old Jul 18th 2023, 8:05 pm
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Default Re: Tax implications for recent L1-A arrival: Advice and recommendations?

Thanks both - that p519 PDF is gold! I am reading that in more detail.

Unfortunately, the NY trip was 11 days, but in any case, I made another (longer) trip February-March. So, if I stay in the US until ~end of September (such that I exceed the 'substantial presence test' threshold'), it looks like I will be considered resident from the start of the year.

I'm now trying to determine what this means. I have already paid tax at source on my UK salary, which was 1st Jan - 31st May. I will read the PDF / Google further, but is it possible I will get taxed on this again? The PDF makes mention of 'closer connections' and potential tax treaty benefits, which I'm trying to decipher.

Thank you again for all your help - I feel both more anxious in some ways, more in control in others!
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Old Jul 18th 2023, 8:15 pm
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Default Re: Tax implications for recent L1-A arrival: Advice and recommendations?

Originally Posted by Andersoc
Thanks both - that p519 PDF is gold! I am reading that in more detail.

Unfortunately, the NY trip was 11 days, but in any case, I made another (longer) trip February-March. So, if I stay in the US until ~end of September (such that I exceed the 'substantial presence test' threshold'), it looks like I will be considered resident from the start of the year.

I'm now trying to determine what this means. I have already paid tax at source on my UK salary, which was 1st Jan - 31st May. I will read the PDF / Google further, but is it possible I will get taxed on this again? The PDF makes mention of 'closer connections' and potential tax treaty benefits, which I'm trying to decipher.

Thank you again for all your help - I feel both more anxious in some ways, more in control in others!
yes it is possible to get taxed again/more… again would apply if you are taxed by a different entity, like a state or city… more can come in to play if you earn it somewhere with low tax rates… e.g. if you worked in Dubai and paid next to no tax you would then be taxed more in the US, the UK is not that low tax so likely you would not pay more federal, I ended up with unused credits that carry over for 10 years and then go away unused… when this happens you effectively pay the highest rate of all applicable countries…

You need to look at it by each set of rules… it’s not either or, it can also be both in some cases, but not all.
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Old Jul 18th 2023, 8:31 pm
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Default Re: Tax implications for recent L1-A arrival: Advice and recommendations?

That could be an expensive vacation! Actually, it likely is not too bad. The IRS (and your state) will tax your UK salary from Jan 1st, but you will get credit for UK tax paid. Given that you will be liable for US tax on worldwide income for the entire 2023 calendar year, but only subject to UK tax on part of the calendar year, it is almost certain that the IRS tax bill will exceed what you paid the UK, and you will only have to pay the balance.

But there is something called the foreign earned income exclusion, FEIE, which allows you to exclude approximately $100,000 in foreign earned income if you were resident in another country when you earned it. You may be eligible to apply that to your UK income and thus shield all of your UK income from IRS taxation Others on this forum have more detailed knowledge than I have, they will likely jump in and advise on that one, but most definitely something to research.

You should be able to get a refund on some (or all) of the UK tax paid for the 2023/2024 year since you had the full tax year personal allowance but only worked a small part of the year. If you can make use of the FEIE then the IRS won’t tax those earnings either, so you come out ahead on that.

It’s tough navigating the first year, and exponentially worse if you have foreign mutual funds. You are doing what you need to do to work through this. Hang on in there. There are so many details, twists and turns but it will be in the rear view mirror soon enough. If you ensure you are compliant reporting all foreign assets from your first tax return you will be in better shape than many.

Last edited by Glasgow Girl; Jul 18th 2023 at 8:36 pm.
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Old Jul 18th 2023, 8:45 pm
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Default Re: Tax implications for recent L1-A arrival: Advice and recommendations?

Originally Posted by Glasgow Girl
That could be an expensive vacation! Actually, it likely is not too bad. The IRS (and your state) will tax your UK salary from Jan 1st, but you will get credit for UK tax paid. Given that you will be liable for US tax on worldwide income for the entire 2023 calendar year, but only subject to UK tax on part of the calendar year, it is almost certain that the IRS tax bill will exceed what you paid the UK, and you will only have to pay the balance.

But there is something called the foreign earned income exclusion, FEIE, which allows you to exclude approximately $100,000 in foreign earned income if you were resident in another country when you earned it. You may be eligible to apply that to your UK income and thus shield all of your UK income from IRS taxation Others on this forum have more detailed knowledge than I have, they will likely jump in and advise on that one, but most definitely something to research.

You should be able to get a refund on some (or all) of the UK tax paid for the 2023/2024 year since you had the full tax year personal allowance but only worked a small part of the year. If you can make use of the FEIE then the IRS won’t tax those earnings either, so you come out ahead on that.

It’s tough navigating the first year, and exponentially worse if you have foreign mutual funds. You are doing what you need to do to work through this. Hang on in there. There are so many details, twists and turns but it will be in the rear view mirror soon enough. If you ensure you are compliant reporting all foreign assets from your first tax return you will be in better shape than many.
I believe the FEIE is only for USC or LPR abroad.

And my experience is that you only get credit for UK taxes paid against federal not state / city tax. I believe it’s slightly different when it comes to Canadian regional tax.
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Old Jul 18th 2023, 9:02 pm
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Default Re: Tax implications for recent L1-A arrival: Advice and recommendations?

Thank you both, and thanks for the sentiment Glasgow Girl - I know I'm not the first one to go through this, and it's never as bad as it seems.

I'm not really sure where to start with tax credits etc., and with the overlapping tax years, it's feels fiddly. Just one example, would I consider the Jan - April portion of my UK salary as taxed at the highest rate, being at the end of the tax year? But yes the April and May combined salary would incur little (UK) tax. I think the next step for me is an accountant - thank you all for being so generous with your time, its feeling like one rabbit hole after another!

I'm starting to think that, however painful, it might be easier to ensure that I don't cross the substantial presence threshold this year and have a clean start next year...
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Old Jul 18th 2023, 9:19 pm
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Default Re: Tax implications for recent L1-A arrival: Advice and recommendations?

Originally Posted by Andersoc
Thank you both, and thanks for the sentiment Glasgow Girl - I know I'm not the first one to go through this, and it's never as bad as it seems.

I'm not really sure where to start with tax credits etc., and with the overlapping tax years, it's feels fiddly. Just one example, would I consider the Jan - April portion of my UK salary as taxed at the highest rate, being at the end of the tax year? But yes the April and May combined salary would incur little (UK) tax. I think the next step for me is an accountant - thank you all for being so generous with your time, its feeling like one rabbit hole after another!

I'm starting to think that, however painful, it might be easier to ensure that I don't cross the substantial presence threshold this year and have a clean start next year...
You pick up an important point… UK and US tax year are different April vs. Calendar year, to do mine I had to gather all paystubs for the UK to apportion to the correct US tax year and it gets even more messy when you get a refund from a prior period. Remember it’s likely cash basis… so if your December salary on a December Paystub was to credit to your account on 1st of Jan it’s a different tax year and gets reported another year later…

this impacts things like a tenant paying rent early or late by a day…


https://www.irs.gov/pub/irs-pdf/p538.pdf

did you get a relocation package ? Some employers pay a year or 2 of tax return preparation to assist your move…

Last edited by tht; Jul 18th 2023 at 9:23 pm.
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Old Jul 18th 2023, 11:21 pm
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Default Re: Tax implications for recent L1-A arrival: Advice and recommendations?

Just dropped by and saw this, for some UK-based complication for you:
There is an added complication. Originally, this was £50k held in the same Vanguard mutual fund. I only recently (while in the US…) decided to use this year’s £20k ISA allowance, sell the £50k of mutual fund and buy £70k of an ETF. Given I had held the the Vanguard fund for so long, I’m not entirely sure whether I realised a gain or a loss.

The ISA allowance is for UK taxpayers only, and it sounds like you may have "used this year's allowance" while not a UK taxpayer? It's been a while since I've needed to concern myself with this though, so possibly you're ok.


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