Beginning in 2018, the statutory tax rate is 21%. Due to the reduced statutory tax rate under the Tax Cuts and Jobs Act ("Tax Act"), we were required to remeasure our deferred tax assets and liabilities using the lower rate at December 22, 2017, the date of enactment. This re-measurement resulted in a reduction of net deferred tax assets of $35.7 million, which includes a $4.7 million benefit related to deferred taxes previously recognized in accumulated other comprehensive income. In accordance with the SEC's Staff Accounting Bulletin No. 118 ("SAB 118"), the Company recorded provisional amounts related to the impacts of the Tax Act as of December 31, 2017, including but not limited to the change in corporate tax rate and immediate expensing of certain capital assets. During 2018, the provisional amounts were adjusted and finalized during the measurement period allowed by SAB 118 and had an immaterial impact on the 2018 income tax expense.

CICA Ltd., a wholly-owned subsidiary of Citizens, is considered a controlled foreign corporation for federal income tax purposes. As a result, the insurance activity of CICA Ltd. is subject to Subpart F of the IRC and is included in Citizens’ taxable income and due to the 0% enacted tax rate in Bermuda there are no deferred taxes recorded for CICA Ltd.'s temporary differences. For the years ended December 31, 2019 and 2018, the Subpart F income inclusion generated $5.9 million and $18.4 million of federal income tax expense, respectively. The December 31, 2018 Subpart F income inclusion was largely driven by the impact of the novation transaction. The novation transaction also resulted in somewhat offsetting adjustments to the current tax liability for CICA, notably an increased amortization of DAC under Section 848 of the IRC, a reduction of premium income and a release of the $50.8 million uncertain tax position related to tax reserves on product qualification issues.

Our federal income tax expense was $7.1 million, $13.1 million and $35.1 million in 2019, 2018 and 2017, respectively. This represents effective tax rates of 126.0%, 652.6% and (1,176.8)%, respectively. The high positive rate in 2018 was primarily due to the large Subpart F income inclusion following the novation transaction. The high negative effective tax rate in 2017 was primarily related to remeasurement of deferred income taxes under the Tax Act reform which went into effect on December 22, 2017.

A reconciliation of federal income tax expense computed by applying the federal income tax rate of 21% in 2019 and 2018 and 35% in 2017 to income (loss) before federal income tax is as follows:



Years ended December 31, (In thousands, except for %)	2019			%		2018			%		2017			%
Expected tax expense (benefit)	$	1,186		21.0	%	$	420		21.0	%	$	(1,045	)	35.0	%
Foreign income tax rate differential	(1,562		)	(27.7	)	(8,133		)	(406.3	)	—			—
Tax-exempt interest and dividends-received deduction	(145		)	(2.6	)	(227		)	(11.3	)	(360		)	12.1
Adjustment of prior year taxes	(99		)	(1.8	)	113			5.6		68			(2.3	)
Effect of graduated rates	—			—		—			—		(140		)	4.7
Effect of uncertain tax position	1,148			20.3		2,612			130.5		(355		)	11.9
Nondeductible costs to remediate tax compliance issue	(27		)	(0.5	)	(366		)	(18.3	)	(384		)	12.9
162(m) compensation limitation	480			8.5		53			2.6		—			—
Subpart F income	5,853			103.6		18,403			919.2		—			—
Tax reform re-measurement	—			—		68			3.4		35,718			(1,196.2	)
Goodwill impairment	—			—		—			—		1,621			(54.3	)
Other	281			5.2		121			6.2		18			(0.6	)
Total federal income tax expense	$	7,115		126.0	%	$	13,064		652.6	%	$	35,141		(1,176.8	)%

Income tax expense consists of:



Years ended December 31, (In thousands)	2019		2018		2017
Current	$	5,542	(49,569	)	14,454
Deferred	1,573		62,633		20,687
Total income tax expense	$	7,115	13,064		35,141

The components of deferred federal income taxes are as follows:



December 31, (In thousands)	2019			2018
Deferred tax assets:
Future policy benefit reserves	$	2,641		2,795
Net operating and capital loss carryforwards	230			191
Investments	702			1,841
Deferred intercompany loss	3,539			5,190
Lease liability	238			—
Other	700			339
Total gross deferred tax assets	8,050			10,356
Deferred tax liabilities:
DAC, COIA and intangible assets	(8,417		)	(8,745	)
Unrealized gains on investments available-for-sale	(7,300		)	(1,968	)
Tax reserves transition liability	(4,483		)	(4,864	)
Right of use lease asset	(238		)	—
Other	(40		)	(488	)
Total gross deferred tax liabilities	(20,478		)	(16,065	)
Net deferred tax liability	$	(12,428	)	(5,709	)

A summary of the changes in the components of deferred federal and state income taxes is as follows:



December 31, (In thousands)	2019			2018
Deferred federal and state income taxes:
Balance January 1,	$	(5,709	)	50,797
Deferred tax benefit	(1,573		)	(62,633	)
Investments available-for-sale	(5,129		)	6,153
Effects of unrealized gains on DAC, COIA and reserves	(17		)	(26	)
Balance December 31,	$	(12,428	)	(5,709	)

MGLIC, an entity that is not eligible to join the Company's consolidated tax return until 2020, had a $1.1 million net operating loss carryforward at December 31, 2019, which will begin expiring in 2036.

The Company and our subsidiaries had no capital loss carryforwards at December 31, 2019, except MGLIC had a $21,000 capital loss carryforward at December 31, 2019, which will begin expiring in 2023.

At December 31, 2019 and 2018, we determined that as a result of our taxable capital gain income in carryback periods, the expected reversal of existing deferred tax liabilities, and tax planning strategies, it was more likely than not that the deferred tax assets would be realized. Thus, the Company holds no valuation allowance in operations or other comprehensive income at December 31, 2019 and 2018.

The Company recognizes only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority.

A reconciliation of unrecognized tax benefits is as follows:



Years ended December 31, (In thousands)	2019		2018		2017
Balance at January 1,	$	44,841	95,831		85,762
Additions based on tax positions related to the current year	—		—		7,384
Additions for tax positions of prior years	1,148		2,268		2,685
Reductions for tax positions of prior years	—		(53,258	)	—
Balance December 31,	$	45,989	44,841		95,831

This unrecognized tax benefit is reported net in current federal income tax payable in the consolidated balance sheets. Included in these amounts is $9.9 million, $8.8 million and $6.5 million of interest expense with respect to unrecognized tax benefit as of December 31, 2019, 2018 and 2017, respectively.

The Company’s unrecognized tax benefits at December 31, 2019 would affect the effective tax rate if recognized. The Company does not believe there is a reasonable possibility the total amount of uncertain tax benefits will significantly increase or decrease in the next twelve months.

The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense. In the consolidated statements of operations and comprehensive income (loss), the amount of interest expense recorded was $1.1 million, $2.3 million and $0.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.

The Company's Federal income tax return is filed on a consolidated basis with the following entities:

Citizens, Inc.

CICA Life Insurance Company of America

Security Plan Life Insurance Company

Security Plan Fire Insurance Company

Computing Technology, Inc.

Citizens National Life Insurance Company

MGLIC files its Federal income tax return on a stand-alone basis as it is not eligible to join the consolidated group until 2020. CICA Ltd. is subject to separate tax reporting.

The method of allocation among companies is subject to a written tax sharing agreement, approved by the Board of Directors, whereby allocation is made primarily on a separate return basis pursuant to the wait-and-see method. Under this method, consolidated group members are not given current credit or refunds for net operating losses until taxable income on a separate return basis is generated. Intercompany tax balances are settled quarterly.

The Company and our subsidiaries file income tax returns in the U.S. Federal jurisdiction and various U.S. states. None of our subsidiaries are subject to examination by U.S. tax authorities for years prior to 2016.