Poll

What is your combined state/federal average tax rate?

less than 0%
0 - 5%
5% - 10%
10% - 15%
15% - 20%
20% - 25%
25% +

Author Topic: What are average income tax rates for Mustachians?  (Read 12561 times)

ender

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What are average income tax rates for Mustachians?
« on: April 05, 2014, 12:00:00 PM »
I am curious what most Mustachian average income tax rates are. Lots of Roth/Traditional discussion doesn't mention average tax rates but it seems understanding them is one of the most important considerations.

By average income tax rate I very specifically mean:

Quote
(State_income_tax_paid + federal_income_tax) / (Adjusted_Gross_Income)


This only adds income taxes to find this percentage - not FICA or other taxes. JUST taxes impacted by Roth/traditional decisions. If you live in a state without state income tax but higher property tax and want to estimate the "state tax which you pay in property tax" feel free to use this instead...

For me, as a single person, this works out to be about 17.5% (my marginal rate is around 33%). It is very unlikely my average tax rate if I early retire early will be this high given I save over half my income currently and don't have a family, which means I am likely comparing an average ER income tax rate of 0-10% at most vs my current marginal rate of 33%. This is more or less what I use to decide when comparing "Roth vs traditional" because all of my income goes in at my current marginal rate and comes out at my average rate (in ER, via roth conversions).

I would love to hear from some of the already ER'ed mustachians what your average income tax rates are so I can better look at this for myself. I suspect most MMM followers in ER end up very close to 0% average income tax unless income includes pension/SS or roth conversions.
 

« Last Edit: April 05, 2014, 12:35:51 PM by enderland »

Cheddar Stacker

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Re: What are average income tax rates for Mustachians?
« Reply #1 on: April 05, 2014, 12:27:37 PM »
Good question, and good lesson for those who argue 15% now is the same as 15% later. While on the surface that seems logical, the average tax rate is what really matters and you have more control over it in retirement than you do now.

I just calculated mine for 2013 and came in at 16.5% so very close to yours. I max the traditional 401K to lower tax but can't deduct a TIRA or contribute to a Roth directly due to the income limitations, so I tend to just save the rest in after tax accounts. I might consider a backdoor Roth in the future, but want to build some real estate holdings first.

I don't know if you can add a poll to a post you already wrote, but when you clicked the "new topic" icon to start this thread, right next to it was the "new poll" button and that's how you add a poll to the forum.

Cassie

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Re: What are average income tax rates for Mustachians?
« Reply #2 on: April 05, 2014, 01:20:24 PM »
We are retired & are at 15%. However, we are both self-employed p.t. so get a lot of office deductions, etc. We pay no state income tax & property taxes are low.

Catbert

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Re: What are average income tax rates for Mustachians?
« Reply #3 on: April 05, 2014, 02:15:20 PM »
I surged into the 28% marginal federal bracket this year but my effective tax rate (as calculated by my CPA) is 18%.  Unfortunately that just counts Federal.  Add another 4% for state.  I guess that's 22% overall which really isn't bad.

I'm retired but did a lot of Roth conversions last year in order to stem the tidal wave of MRDs in a few years.

gecko10x

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Re: What are average income tax rates for Mustachians?
« Reply #4 on: April 05, 2014, 03:55:17 PM »
Oops, my vote is wrong. I didn't add my state in.

Zaga

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Re: What are average income tax rates for Mustachians?
« Reply #5 on: April 05, 2014, 04:10:16 PM »
Including state we're just over 17% for 2013. 

I think 2014 will be better because we lost DH's access to a 401-K for 7 months of 2013 due to a job change.  This year also we are both putting 20% into 401-K's, that is the most my employer allows (the jerks!) and that should put DH right about at maxing out.  It's hard to be sure though since he's a contractor and paid hourly not salary.

Emilyngh

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Re: What are average income tax rates for Mustachians?
« Reply #6 on: April 05, 2014, 04:45:18 PM »
We are able to keep our federal very close to 0%.   However, our state is less progressive and I can't find a way out of owing about 4%.

Psychstache

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Re: What are average income tax rates for Mustachians?
« Reply #7 on: April 05, 2014, 05:13:29 PM »
Made it down to 7% this year with a six figure income. Planning to get it just under 5 this year.

NinetyFour

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Re: What are average income tax rates for Mustachians?
« Reply #8 on: April 05, 2014, 05:41:23 PM »
I got money back from both the Feds and the state, mostly because of deductions associated with my rental.

plantingourpennies

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Re: What are average income tax rates for Mustachians?
« Reply #9 on: April 05, 2014, 06:21:16 PM »
We are at 16% federal, and 1% effective state income tax if you take our property taxes (which are <1% of our property value) as a sub-in.  Not sure that's an apples to apples comparison since our property taxes are on par with many other locales that have an income tax in addition to the property tax. 

Thegoblinchief

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Re: What are average income tax rates for Mustachians?
« Reply #10 on: April 05, 2014, 07:42:26 PM »
3.7% total.

Federal is 1.2, state is 2.5.

zolotiyeruki

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Re: What are average income tax rates for Mustachians?
« Reply #11 on: April 05, 2014, 10:02:36 PM »
We're right about 0% net--we're heavily in negative terrritory on federal (yay, exemptions and child tax credit!) and about the same amount positive for Illinois.  Which means that if I get a raise this year, we'll be plowing it into a Roth, since we won't be paying taxes on it anyway!

Nothlit

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Re: What are average income tax rates for Mustachians?
« Reply #12 on: April 06, 2014, 06:37:37 AM »
4.6% state
+15.3% federal
-----------------
19.9% total

ender

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Re: What are average income tax rates for Mustachians?
« Reply #13 on: April 07, 2014, 07:17:44 AM »
This is really interesting to me. I wonder if the higher numbers are a result of lots of mustachians having high dual incomes still in the saving phase?


Roland of Gilead

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Re: What are average income tax rates for Mustachians?
« Reply #14 on: April 07, 2014, 07:24:50 AM »
21.2% federal (not counting SS and medicare)
8% state

29.2% ouch

soccerluvof4

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Re: What are average income tax rates for Mustachians?
« Reply #15 on: April 07, 2014, 08:20:42 AM »
Despite maxing out 401k, HSA etc...and me in ER were still on the high end. But this is a good thing for now. Being self -employed we will ride this out another 3-3.5 years hopefully but then thats it!!!!!!. At that point will sell the business or close the doors and take the monies in it as there in no debt and cash flow is high.

Cheddar Stacker

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Re: What are average income tax rates for Mustachians?
« Reply #16 on: April 07, 2014, 08:47:04 AM »
This is really interesting to me. I wonder if the higher numbers are a result of lots of mustachians having high dual incomes still in the saving phase?

I'm sure that's part of it. The board has plenty of families with low incomes and a lot of kids, but the demographic here seems to be more skewed towards DINK's in the accumulation phase.

Right now the poll shows about half (39 of 82) votes in the > 20% range, including state taxes. That's likely higher than national average, but still leaves most people in the 15-25% tax brackets or below which isn't too bad.

I think it's worth noting the question doesn't take into account deductions, exemptions, and tax credits at all since we are comparing AGI to total federal tax (not meant to be a complaint, just an observation). This means people who rent in NYC, SF, and other high cost areas are likely paying a higher average rate than homeowners with kids like me ($18K itemized, $15.6K exemptions, $1,500 tax credits) based on how the question is worded.

I noted one particular NYer above who's AGI was lower than my family, but they paid a higher average tax rate. I'm sure some of that has to do with high NY state and city taxes, but it's also partly explainable by a standard deduction and only 2 exemptions. Deductions and credits are just as much a part of tax planning as IRA's for some people and others don't (or can't) take advantage of these.

nawhite

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Re: What are average income tax rates for Mustachians?
« Reply #17 on: April 07, 2014, 10:17:44 AM »
This is really interesting to me. I wonder if the higher numbers are a result of lots of mustachians having high dual incomes still in the saving phase?

Sure doesn't apply for my DINK family in Colorado. (maybe if we lived in California?). Based on AGI we are at 15.2% overall, based on total Income and Gains we are at 13.2%.

Max the 401k, max Traditional IRA contributions, max HSA, 529 contributions for future kids, $2500 in student loan interest, Deduct loan origination fees on new mortgage (got a bunch of points), lock in a huge capital loss, education credits for grad school, etc.

Next year our income will go up about 18% but I'm expecting our taxes to go down percentage-wise because I'm getting better at this tax planning thing.

ender

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Re: What are average income tax rates for Mustachians?
« Reply #18 on: April 07, 2014, 10:23:30 AM »
I think it's worth noting the question doesn't take into account deductions, exemptions, and tax credits at all since we are comparing AGI to total federal tax (not meant to be a complaint, just an observation). This means people who rent in NYC, SF, and other high cost areas are likely paying a higher average rate than homeowners with kids like me ($18K itemized, $15.6K exemptions, $1,500 tax credits) based on how the question is worded.

I thought about this when I was posting the question, but I didn't want this to become a super complicated question to figure out. Plus, to some extent I was hoping to get a feel for what I've gotten.

If anything I should have made it two polls, one for those who are already FIRE/ER'ed and another for those still working.

jordanread

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Re: What are average income tax rates for Mustachians?
« Reply #19 on: April 08, 2014, 02:12:05 PM »
I really need to figure out how to optimize that. 25%+ sucks!!

Sacadoh

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Re: What are average income tax rates for Mustachians?
« Reply #20 on: April 08, 2014, 02:30:16 PM »
UK rates are crazy. Had I not managed my tax I would have gone through the various steps below_
0%
20%
40%
60%
40%
And these steps ignore an extra tax called national insurance.

There is a further band of 45% but I don't earn enough.

My actual rate suffered last year was c14%.


nawhite

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Re: What are average income tax rates for Mustachians?
« Reply #21 on: April 08, 2014, 03:12:16 PM »
I really need to figure out how to optimize that. 25%+ sucks!!

Can you go into detail of how you pay 25% tax in Colorado? State tax is 4.3% and for a couple filing jointly in order to get your federal effective tax rate to 20.7% you need to make around $250,000 (more if you are contributing to 401ks etc).

So do you make around $250k if married or $130k if single or are there other taxes I'm not thinking of?

Frankies Girl

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Re: What are average income tax rates for Mustachians?
« Reply #22 on: April 08, 2014, 03:35:03 PM »
No state tax, and up until this year our effective federal tax rate was 8.75%. DINKs and still working currently.

An inheritance pushed us up into 17% territory, but we'll be back down to below 10% next year.

Zikoris

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Re: What are average income tax rates for Mustachians?
« Reply #23 on: April 08, 2014, 03:49:46 PM »
I got it down to about 4% in 2013 - roughly $1600 in taxes paid out of roughly $40,000 gross. My boyfriend was lower but I can't remember how much (maybe 1%?). Canadian, so tax laws are a bit different than the states, but we try to take advantage of anything we legally can.

dragoncar

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Re: What are average income tax rates for Mustachians?
« Reply #24 on: April 08, 2014, 04:01:39 PM »
Mandatory poll complaint here:  why are we using AGI?  Wouldn't we rather have my 401k contribution lower my effective tax rate ?

As % of AGI: 25%

jordanread

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Re: What are average income tax rates for Mustachians?
« Reply #25 on: April 08, 2014, 05:34:11 PM »
I really need to figure out how to optimize that. 25%+ sucks!!

Can you go into detail of how you pay 25% tax in Colorado? State tax is 4.3% and for a couple filing jointly in order to get your federal effective tax rate to 20.7% you need to make around $250,000 (more if you are contributing to 401ks etc).

So do you make around $250k if married or $130k if single or are there other taxes I'm not thinking of?

Yeah, you are right. I was going off of the tax brackets, not looking at my actual numbers. Looking at my real numbers, it's still pretty awful.

Gross Income = $50617
Taxes Paid = $10507

Gives me a tax rate of 20.7%. Better than I thought...No contributions, essentially pre-mustachian, and includes the refund.

Abe

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Re: What are average income tax rates for Mustachians?
« Reply #26 on: April 08, 2014, 05:45:05 PM »
12% Federal + 4.5% State with $130k AGI.

Cecil

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Re: What are average income tax rates for Mustachians?
« Reply #27 on: April 08, 2014, 06:32:46 PM »
I just looked up my 2013 tax return which I've filed already. Combined between my wife and I in Vancouver, Canada, with no kids:

Gross income: $123579
Total tax paid: $13873
Total CPP: $4590
Total EI: $1782

Total tax rate: 16.4%

Plus an extra $30/month or so for health insurance.

Mazzinator

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Re: What are average income tax rates for Mustachians?
« Reply #28 on: April 08, 2014, 07:59:10 PM »
$130k gross (only $76k is taxable due to AD army)
Max out TSP
Max out 2 tIRAs
MFJ with 2 kids
Tax exempt to state tax
Tax owed negative $500 (refund credits, not overpayment)

Again, this is beacuse of active duty army.

Notch

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Re: What are average income tax rates for Mustachians?
« Reply #29 on: April 08, 2014, 08:37:02 PM »
In Australia: average tax of 21% on $102,000.

Abe

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Re: What are average income tax rates for Mustachians?
« Reply #30 on: April 08, 2014, 09:27:49 PM »
I just looked up my 2013 tax return which I've filed already. Combined between my wife and I in Vancouver, Canada, with no kids:

Gross income: $123579
Total tax paid: $13873
Total CPP: $4590
Total EI: $1782

Total tax rate: 16.4%

Plus an extra $30/month or so for health insurance.

12% Federal + 4.5% State with $130k AGI. (Illinois)


And here I thought socialism destroys our will to live with taxes!

Ozstache

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Re: What are average income tax rates for Mustachians?
« Reply #31 on: April 08, 2014, 09:38:19 PM »
26% before ER
19% after ER

Cwadda

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Re: What are average income tax rates for Mustachians?
« Reply #32 on: April 08, 2014, 09:42:24 PM »
Little to no tax on my normal job that pays $15 per hour. 10% tax on my "miscellaneous income" organist job.

nawhite

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Re: What are average income tax rates for Mustachians?
« Reply #33 on: April 09, 2014, 03:14:21 PM »
I really need to figure out how to optimize that. 25%+ sucks!!

Can you go into detail of how you pay 25% tax in Colorado? State tax is 4.3% and for a couple filing jointly in order to get your federal effective tax rate to 20.7% you need to make around $250,000 (more if you are contributing to 401ks etc).

So do you make around $250k if married or $130k if single or are there other taxes I'm not thinking of?

Yeah, you are right. I was going off of the tax brackets, not looking at my actual numbers. Looking at my real numbers, it's still pretty awful.

Gross Income = $50617
Taxes Paid = $10507

Gives me a tax rate of 20.7%. Better than I thought...No contributions, essentially pre-mustachian, and includes the refund.

Color me surprised. Definitely makes a 401k or traditional IRA worth it for you. Putting $5500 in a Traditional IRA is worth over $1000/year to you in saved taxes.

jordanread

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Re: What are average income tax rates for Mustachians?
« Reply #34 on: April 09, 2014, 04:27:18 PM »
I really need to figure out how to optimize that. 25%+ sucks!!

Can you go into detail of how you pay 25% tax in Colorado? State tax is 4.3% and for a couple filing jointly in order to get your federal effective tax rate to 20.7% you need to make around $250,000 (more if you are contributing to 401ks etc).

So do you make around $250k if married or $130k if single or are there other taxes I'm not thinking of?

Yeah, you are right. I was going off of the tax brackets, not looking at my actual numbers. Looking at my real numbers, it's still pretty awful.

Gross Income = $50617
Taxes Paid = $10507

Gives me a tax rate of 20.7%. Better than I thought...No contributions, essentially pre-mustachian, and includes the refund.

Color me surprised. Definitely makes a 401k or traditional IRA worth it for you. Putting $5500 in a Traditional IRA is worth over $1000/year to you in saved taxes.
.Yeah, I did open a 401k this year, and am almost maxing it out. Depending on how badass I do this year, I might make an extra payment to bring it up to the max. Still not sure about an IRA, mostly due to my ignorance on the matter. Just opened a Vanguard account last month. In the process of quitting smoking too.

beltim

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Re: What are average income tax rates for Mustachians?
« Reply #35 on: April 09, 2014, 04:35:27 PM »
This thread almost makes me support the AMT.

seattlecyclone

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Re: What are average income tax rates for Mustachians?
« Reply #36 on: April 09, 2014, 04:47:05 PM »
This thread almost makes me support the AMT.

I paid a bunch of AMT last year (and will do so again this year) because the exercise of incentive stock options is a taxable event under the AMT but it isn't under the regular tax system. That's why I had to answer "> 25%" to this poll. I really can't complain, though. I'm much closer to FI with the options than without them.

The nice thing is that I'll be able to claim this year's AMT as a credit in future years when I don't owe AMT anymore. In the meantime it's like giving a 0% loan to the government, and I'm not likely to be fully repaid for a decade or more.

nottoolatetostart

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Re: What are average income tax rates for Mustachians?
« Reply #37 on: April 09, 2014, 07:23:42 PM »
Using the equation posted above, 23.7%. Throw in FICA and we are over 30%. Ouch.

Spartana

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Re: What are average income tax rates for Mustachians?
« Reply #38 on: April 09, 2014, 07:47:28 PM »
Zero! Fed and State (Cali) both. Not working any longer and my taxable income just under the standard exemption and deduction amount. The rest of my income is from non-taxed sources (like my tiny military disability pension).

jordanread

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Re: What are average income tax rates for Mustachians?
« Reply #39 on: April 10, 2014, 09:43:18 AM »
If you have $5500 kicking around in the next 6 days, it's worth just shoving it in a Vanguard Target Date retirement fund in a traditional IRA to get the tax deduction for last year. You can figure out how to invest it better later, but it'll save you money on taxes right now.

Yeah, no money is liquid right now. I am definitely looking more at taxes and what I can do to optimize them going forward. If I'm reading this right though, what you are saying is that I get the taxes back on what I put into the Vanguard (IRA I'm assuming?) Account since it's a retirement account. 20% of $5500 = 1100 they would reimburse? Is that how that works with putting already taxed money into an untaxed account?

nawhite

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Re: What are average income tax rates for Mustachians?
« Reply #40 on: April 10, 2014, 10:35:45 AM »
If you have $5500 kicking around in the next 6 days, it's worth just shoving it in a Vanguard Target Date retirement fund in a traditional IRA to get the tax deduction for last year. You can figure out how to invest it better later, but it'll save you money on taxes right now.

Yeah, no money is liquid right now. I am definitely looking more at taxes and what I can do to optimize them going forward. If I'm reading this right though, what you are saying is that I get the taxes back on what I put into the Vanguard (IRA I'm assuming?) Account since it's a retirement account. 20% of $5500 = 1100 they would reimburse? Is that how that works with putting already taxed money into an untaxed account?

Yep, any money you put into a Traditional IRA (up to $5500) you can put right on line 32 of your 1040 and it comes out of your income. So yes, if you will get 20% back (up to $1100) on anything you contribute if you include it on your 1040. Just call up Vanguard (or go to their website: https://investor.vanguard.com/what-we-offer/iras/steps-to-open-an-ira) and open a "Traditional IRA."

Technically the traditional IRA works the same way as the 401k, the difference is the 401k is pulled out of your paycheck before taxes are taken out in the first place so it comes out even in the end (a $5500 contribution to an IRA would have the same effect on your taxes as a $5500 contribution to a 401k). 

Disclaimer: I'm not a registered investment adviser or anything like that so do your own research. For instance you may find a ROTH IRA fits your needs better than a traditional (I doubt it, but its possible).

seattlecyclone

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Re: What are average income tax rates for Mustachians?
« Reply #41 on: April 10, 2014, 10:43:07 AM »
If you have $5500 kicking around in the next 6 days, it's worth just shoving it in a Vanguard Target Date retirement fund in a traditional IRA to get the tax deduction for last year. You can figure out how to invest it better later, but it'll save you money on taxes right now.

Yeah, no money is liquid right now. I am definitely looking more at taxes and what I can do to optimize them going forward. If I'm reading this right though, what you are saying is that I get the taxes back on what I put into the Vanguard (IRA I'm assuming?) Account since it's a retirement account. 20% of $5500 = 1100 they would reimburse? Is that how that works with putting already taxed money into an untaxed account?

Vanguard wouldn't reimburse your taxes. You would have to file an amended tax return with the IRS showing a higher IRA deduction (or just put it on your original tax return if you haven't filed it yet). Then they would give you a higher refund than you would have gotten without the IRA deduction.

jordanread

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Re: What are average income tax rates for Mustachians?
« Reply #42 on: April 10, 2014, 10:53:41 AM »
Vanguard wouldn't reimburse your taxes. You would have to file an amended tax return with the IRS showing a higher IRA deduction (or just put it on your original tax return if you haven't filed it yet). Then they would give you a higher refund than you would have gotten without the IRA deduction.

Yeah, I meant the royal "They"...i.e. the IRS. :-)