Income Taxes

The components of income tax provision attributable to continuing operations were as follows:



	Years Ended December 31,
	2016			2015			2014
	(in millions)
Current income tax
Federal	$	245		$	509		$	248
State and local	44			36			33
Foreign	23			41			36
Total current income tax	312			586			317

Deferred income tax
Federal	(36		)	(124		)	202
State and local	3			(4		)	30
Foreign	(1		)	(3		)	(4		)
Total deferred income tax	(34		)	(131		)	228
Total income tax provision	$	278		$	455		$	545

The geographic sources of pretax income from continuing operations were as follows:



	Years Ended December 31,
	2016		2015		2014
	(in millions)
United States	$	1,412	$	1,710	$	1,858
Foreign	180		432		689
Total	$	1,592	$	2,142	$	2,547

In December 2014, the Company received Internal Revenue Service (“IRS”) approval for a change in accounting method related to variable annuity hedging. Accordingly, the Company began using the approved method of accounting in the fourth quarter of 2014. The change to the approved method increased deferred tax expense and current tax receivables with a corresponding decrease to current tax expense and deferred tax assets of approximately $300 million in 2014.

The principal reasons that the aggregate income tax provision attributable to continuing operations is different from that computed by using the U.S. statutory rate of 35% were as follows:



	Years Ended December 31,
	2016		2015		2014
Tax at U.S. statutory rate	35.0	%	35.0	%	35.0	%
Changes in taxes resulting from:
Net income attributable to noncontrolling interests	—		(2.0	)	(5.2	)
Dividends received deduction	(7.6	)	(6.7	)	(4.7	)
Low income housing tax credits	(4.2	)	(3.0	)	(2.1	)
Taxes applicable to prior years	(3.1	)	—		(0.2	)
Foreign taxes	(2.5	)	—		—
State taxes, net of federal benefit	1.9		—		1.6
Foreign tax credits, net of addback	(1.6	)	(2.1	)	(2.0	)
Tax-exempt interest income	—		—		(0.7	)
Other, net	(0.5	)	0.1		(0.3	)
Income tax provision	17.4	%	21.3	%	21.4	%

The decrease in the Company’s effective tax rate in 2016 compared to 2015 is primarily the result of lower pretax income in relation to tax preferred items including the dividends received deduction, low income housing tax credits and a $27 million benefit related to final resolution on the 1997 through 2005 IRS audit.

Accumulated earnings of certain foreign subsidiaries, which totaled $321 million at December 31, 2016, are intended to be permanently reinvested outside the United States. Accordingly, U.S. federal taxes, which would have aggregated $76 million, have not been provided on those earnings.

Deferred income tax assets and liabilities result from temporary differences between the assets and liabilities measured for GAAP reporting versus income tax return purposes. The significant components of the Company’s deferred income tax assets and liabilities, which are included net within other assets or other liabilities on the Consolidated Balance Sheets, were as follows:



	December 31,
	2016		2015
	(in millions)
Deferred income tax assets
Liabilities for policyholder account balances, future policy benefits and claims	$	1,177	$	1,391
Deferred compensation	439		384
Investment related	253		118
Postretirement benefits	62		56
Currency translation adjustments	73		—
Other	68		87
Gross deferred income tax assets	2,072		2,036
Less: valuation allowance	11		11
Total deferred income tax assets	2,061		2,025

Deferred income tax liabilities
Deferred acquisition costs	717		730
Net unrealized gains on Available-for-Sale securities	264		233
Depreciation expense	146		169
Deferred sales inducement costs	113		125
Intangible assets	126		113
Goodwill	74		66
Other	2		18
Gross deferred income tax liabilities	1,442		1,454
Net deferred income tax assets	$	619	$	571

Included in the Company’s deferred income tax assets are tax benefits related to state net operating losses of $14 million, net of federal benefit, which will expire beginning December 31, 2017. Based on analysis of the Company’s tax position, management believes it is more likely than not that the Company will not realize certain state deferred tax assets and state net operating losses and therefore a valuation allowance of $11 million has been established.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits was as follows:



	2016			2015			2014
	(in millions)
Balance at January 1	$	161		$	242		$	209
Additions based on tax positions related to the current year	15			18			17
Additions for tax positions of prior years	33			48			35
Reductions for tax positions of prior years	(87		)	(147		)	(19		)
Audit settlements	(7		)	—			—
Balance at December 31	$	115		$	161		$	242

If recognized, approximately $46 million, $57 million and $57 million, net of federal tax benefits, of unrecognized tax benefits as of December 31, 2016, 2015, and 2014, respectively, would affect the effective tax rate.

It is reasonably possible that the total amounts of unrecognized tax benefits will change in the next 12 months. The Company estimates that the total amount of gross unrecognized tax benefits may decrease by $60 million to $70 million in the next 12 months primarily due to resolution of IRS examinations.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. The Company recognized a net decrease of $43 million, and a net increase of $3 million, and $6 million in interest and penalties for the years ended December 31, 2016, 2015, and 2014, respectively. At December 31, 2016 and 2015, the Company had a payable of $8 million and $51 million, respectively, related to accrued interest and penalties.

The Company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. In 2016, the Company received a settlement as final resolution to the 1997 through 2005 IRS audit. The IRS has completed its examination of the 2006 through 2011 tax returns and these years are effectively settled; however, the statutes of limitation, except for 2007, remain open for certain carryover adjustments. The IRS is currently auditing the Company’s U.S. income tax returns for 2012 and 2013. The Company’s state income tax returns are currently under examination by various jurisdictions for years ranging from 2005 through 2015.