Note 5. Income Taxes

Total income taxes were allocated as follows:

	2016		2015
Total tax expense on income	$	888	$	1,320

Tax expense (benefit) on components of shareholders’ equity:
Net unrealized gains (losses) on investment securities		671		(2,528	)
Total tax expense (benefit)	$	1,559	$	(1,208	)

A reconciliation of the differences between income taxes computed at the federal statutory income tax rate and the income tax expense is as follows:

	2016			2015
Federal income tax provision at statutory rate of 35%	$	1,233		$	1,998
Dividends-received deduction		(95	)		(99	)
Small life insurance company deduction		(376	)		(582	)
Other		55			42
Adjustment for prior years’ estimates to actual		71			(39	)
Income tax expense	$	888		$	1,320
Effective tax rate		25.2	%		23.1	%

The primary differences between the effective tax rate and the federal statutory income tax rate for 2016 and 2015 resulted from the dividends-received deduction (“DRD”) and the small life insurance company deduction (“SLD”). The current estimated DRD is adjusted as underlying factors change and can vary from estimates based on, but not limited to, actual distributions from investments as well as the amount of the Company’s taxable income. The SLD varies in amount and is determined at a rate of 60 percent of the tentative life insurance company taxable income (“LICTI”). The SLD for any taxable year is reduced (but not below zero) by 15 percent of the tentative LICTI for such taxable year as it exceeds $3,000 and is ultimately phased out at $15,000.

Deferred tax liabilities and assets at December 31, 2016 and 2015 were comprised of the following:

	2016			2015
Deferred tax liabilities:
Deferred acquisition costs	$	(2,345	)	$	(2,623	)
Deferred and uncollected premiums		(654	)		(677	)
Net unrealized investment gains		(3,140	)		(2,469	)
Other		(666	)		(642	)
Total deferred tax liabilities		(6,805	)		(6,411	)
Deferred tax assets:
Insurance reserves		4,589			4,522
Impaired assets		1,454			1,474
Alternative minimum tax credit		282			504
Bad debts and other		640			740
Total deferred tax assets		6,965			7,240
Net deferred tax asset	$	160		$	829

The components of income tax expense were:

	2016			2015
Current - Federal	$	890		$	1,016
Deferred - Federal		(2	)		304
Total	$	888		$	1,320

The Company has formal tax-sharing agreements, and files a consolidated income tax return, with its subsidiaries. Tax years prior to 2012 have been audited by the Internal Revenue Service and are closed.