Income Taxes

The following table reconciles the total provision for income taxes recorded in the consolidated statements of income with the amounts computed at the statutory federal tax rate for the periods presented below.

TABLE 88: INCOME TAXES



	FOR THE YEAR ENDED DECEMBER 31,
(In Millions)	2018			2017			2016
Federal Rate	21.0		%	35.0		%	35.0		%
Tax at Statutory Rate	$	411.1		$	571.9		$	531.0
Tax Exempt Income	(6.9		)	(9.6		)	(7.2		)
Foreign Tax Rate Differential	(7.3		)	(50.0		)	(50.9		)
Excess Tax Benefit Related to Share-Based Compensation	(16.8		)	(31.6		)	(12.3		)
State Taxes, net	65.5			41.0			31.1
Impact of Tax Cuts and Jobs Act	(4.8		)	(53.1		)	—
Change in Accounting Method	(24.4		)	—			—
Other	(15.0		)	(33.7		)	(7.1		)

Provision for Income Taxes	$	401.4		$	434.9		$	484.6

The current year includes tax benefits primarily attributable to the reduction in the U.S. corporate income tax rate from 35% to 21% as a result of the Tax Cuts and Jobs Act (TCJA) enacted in the fourth quarter of 2017, a tax benefit recognized in 2018 resulting from a change in accounting method regarding the timing of tax deductions for software-related expenses, and adjustments recorded in the current year associated with the implementation of the TCJA as outlined below.

These decreases to the provision for income taxes in the current year were partially offset by the impact of an increase in income before income taxes, tax accounting changes in 2018 brought about by the TCJA including the tax accounting associated with additional non-deductible expenses, and a reduction in the income tax benefit derived from the vesting of restricted stock units and stock option exercises. Additionally, the 2017 provision for income taxes included a net benefit attributable to the implementation of the TCJA of $53.1 million and Federal and State research tax credits of $17.6 million related to the Corporation’s technology spend between 2013 and 2016, each resulting in a reduction of the effective tax rate.

The TCJA was enacted on December 22, 2017, and reduced the U.S. federal corporate tax rate from 35% to 21%. It also required companies to pay a mandatory deemed repatriation tax on earnings of foreign subsidiaries that were previously tax deferred. At December 31, 2017, Northern Trust made a reasonable estimate as to the impact of the TCJA. During 2018, Northern Trust completed the related calculations and additional analyses associated with the implementation of the TCJA, resulting in a number of adjustments to the 2018 tax provision as follows:

TABLE 89: IMPACT OF TAX CUTS AND JOBS ACT



(In Millions)	2018			2017
Federal Taxes on Mandatory Deemed Repatriation	$	(16.8	)	$	150.0
Impact Related to Federal Deferred Taxes	12.7			(210.0		)
Other Adjustments	(0.7		)	6.9

Provision (Benefit) for Income Taxes	$	(4.8	)	$	(53.1	)

Adjustments in the above table include a tax benefit of $16.8 million resulting from an adjustment to the Corporation’s 2017 income tax provision for mandatory deemed repatriation with respect to the pre-2018 earnings of its non-US subsidiaries, offset by a $12.7 million net provision associated with the repricing of deferred taxes.

For tax years beginning after December 31, 2017, the TCJA introduces new provisions for U.S. taxation of certain global intangible low-taxed income (GILTI). Northern Trust has made the policy election to record any current year tax expense associated with GILTI in the period in which it is incurred.

The Corporation files income tax returns in the U.S. federal, various state, and foreign jurisdictions. The Corporation is no longer subject to income tax examinations by U.S. federal authorities before 2013, U.S. state or local tax authorities for years before 2011, or non-U.S. tax authorities for years before 2010.

Included in other liabilities within the consolidated balance sheets at December 31, 2018 and 2017 were $21.9 million and $27.7 million of unrecognized tax benefits, respectively. If recognized, 2018 and 2017 net income would have increased by $19.8 million and $21.7 million, respectively, resulting in a decrease of those years’ effective income tax rates. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

TABLE 90: UNRECOGNIZED TAX BENEFITS



(In Millions)	2018			2017
Balance at January 1	$	27.7		$	17.2
Additions for Tax Positions Taken in the Current Year	0.5			9.9
Additions for Tax Positions Taken in Prior Years	1.7			6.2
Reductions for Tax Positions Taken in Prior Years	(7.8		)	(5.4		)
Reductions Resulting from Expiration of Statutes	(0.2		)	(0.2		)

Balance at December 31	$	21.9		$	27.7

Unrecognized tax benefits had net decreases of $5.8 million, resulting in a remaining balance of $21.9 million at December 31, 2018, compared to net increases of $10.5 million resulting in a remaining balance of $27.7 million at December 31, 2017. It is possible that changes in the amount of unrecognized tax benefits could occur in the next 12 months due to changes in judgment related to recognition or measurement, settlements with taxing authorities, or expiration of statute of limitations. Management does not believe that future changes, if any, would have a material effect on the consolidated financial position or liquidity of Northern Trust, although they could have a material effect on operating results for a particular period.

A provision for interest and penalties of $0.3 million, net of tax, was included in the provision for income taxes for the year ended December 31, 2018. This compares to a provision for interest and penalties of $0.1 million, net of tax, for the year ended December 31, 2017. As of December 31, 2018 and 2017, the liability for the potential payment of interest and penalties totaled $9.2 million and $10.3 million, net of tax, respectively.

The components of the consolidated provision for income taxes for each of the three years ended December 31 are as follows:

TABLE 91: PROVISION FOR INCOME TAXES



	FOR THE YEAR ENDED DECEMBER 31,
(In Millions)	2018			2017			2016
Current Tax Provision:
Federal	$	132.8		$	347.3		$	495.8
State	95.4			38.3			65.3
Non-U.S.	162.7			125.4			99.3

Total	390.9			511.0			660.4
Deferred Tax Provision:
Federal	$	33.8		$	(96.4	)	$	(159.0	)
State	(13.8		)	24.6			(18.9		)
Non-U.S.	(9.5		)	(4.3		)	2.1

Total	10.5			(76.1		)	(175.8		)

Provision for Income Taxes	$	401.4		$	434.9		$	484.6

In addition to the amounts shown above, tax charges and benefits have been recorded directly to stockholders’ equity for the following:

TABLE 92: TAX CHARGES AND BENEFITS RECORDED DIRECTLY TO STOCKHOLDERS’ EQUITY



	FOR THE YEAR ENDED DECEMBER 31,
(In Millions)	2018		2017			2016
Current Tax Benefit (Charge) for Employee Stock Options and Other Stock-Based Plans	$	—	$	—		$	(7.6	)
Tax Effect of Other Comprehensive Income	25.7		(112.4		)	72.4

Deferred taxes result from temporary differences between the amounts reported in the consolidated financial statements and the tax bases of assets and liabilities. As a result of the TCJA being enacted on December 22, 2017, deferred tax assets and liabilities as of December 31, 2018 and 2017 were measured at 21%, compared to 35% as of December 31, 2016, based on the federal tax rate at which they are expected to reverse in the future. Deferred tax assets and liabilities have been computed as follows:

TABLE 93: NET DEFERRED TAX LIABILITIES



	DECEMBER 31,
(In Millions)	2018			2017
Deferred Tax Liabilities:
Lease Financing	$	43.3		$	85.8
Software Development	193.2			187.8
Accumulated Depreciation	129.5			41.0
Compensation and Benefits	10.9			—
State Taxes, net	58.9			59.4
Other Liabilities	114.5			145.7

Gross Deferred Tax Liabilities	550.3			519.7

Deferred Tax Assets:
Allowance for Credit Losses	29.0			32.3
Compensation and Benefits	—			35.5
Other Assets	120.6			88.3

Gross Deferred Tax Assets	149.6			156.1

Valuation Reserve	(0.3		)	(1.1		)
Deferred Tax Assets, net of Valuation Reserve	149.3			155.0

Net Deferred Tax Liabilities	$	401.0		$	364.7

Northern Trust had various state net operating loss carryforwards as of December 31, 2018 and 2017. The income tax benefits associated with these loss carryforwards were approximately $0.3 million as of December 31, 2018 and $1.1 million as of December 31, 2017. A valuation allowance of $0.3 million was recorded at December 31, 2018 and $1.1 million as of December 31, 2017, as management believes the net operating losses will not be fully realized. No valuation allowance related to the remaining deferred tax assets was recorded at December 31, 2018 and 2017, as management believes it is more likely than not that the deferred tax assets will be fully realized.