Income Taxes

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



	Years Ended December 31,
	2017			2016			2015
	(in millions)
Current income tax
Federal	$	468		$	245		$	509
State and local	58			44			36
Foreign	52			23			41
Total current income tax	578			312			586

Deferred income tax
Federal	169			(36		)	(124		)
State and local	(5		)	3			(4		)
Foreign	(8		)	(1		)	(3		)
Total deferred income tax	156			(34		)	(131		)
Total income tax provision	$	734		$	278		$	455

On December 22, 2017, the Tax Act was signed into law. The provision for income taxes for the year ended December 31, 2017 includes an expense of $286 million due to the enactment of the Tax Act. The $286 million expense includes: 1) a $221 million expense for the remeasurement of deferred tax assets and liabilities to the Tax Act’s statutory rate of 21%; 2) a $57 million expense for the foreign provisions of the Tax Act, including a deemed repatriation tax of the Company’s total post-1986 earnings and profits (“E&P”); and 3) an $8 million expense for the remeasurement of tax contingencies, specifically state tax contingencies and interest accrued for tax contingencies.

The Company considers the expenses related to the remeasurement of deferred tax assets and liabilities and the foreign provisions of the Tax Act to be provisional amounts based on reasonable estimates as discussed below.

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



	Years Ended December 31,
	2017		2016		2015
	(in millions)
United States	$	1,988	$	1,412	$	1,710
Foreign	226		180		432
Total	$	2,214	$	1,592	$	2,142

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,
	2017		2016		2015
Tax at U.S. statutory rate	35.0	%	35.0	%	35.0	%
Changes in taxes resulting from:
Impact of the Tax Act	13.0		—		—
Dividends received deduction	(5.8	)	(7.6	)	(6.7	)
Low income housing tax credits	(3.4	)	(4.2	)	(3.0	)
Incentive compensation	(3.0	)	—		—
Foreign taxes	(2.0	)	(2.5	)	—
Foreign tax credits, net of addback	—		(1.6	)	(2.1	)
Taxes applicable to prior years	—		(3.1	)	—
State taxes, net of federal benefit	—		1.9		—
Net income attributable to noncontrolling interests	—		—		(2.0	)
Other, net	(0.7	)	(0.5	)	0.1
Income tax provision	33.1	%	17.4	%	21.3	%

The increase in the Company’s effective tax rate for the year ended December 31, 2017 compared to 2016 was primarily due to a $286 million expense in 2017 due to provisions of the Tax Act, including remeasurement of net deferred tax assets, a deemed repatriation of E&P and remeasurement of tax contingencies, partially offset by a $70 million benefit for net excess tax benefits related to the adoption of a new accounting standard for employee share-based payments. 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.

As of December 31, 2017, the Company had not fully completed its accounting for the tax effects of the enactment of the Tax Act; however, the Company is able to provide reasonable estimates of the Tax Act’s impact. The Company’s provision for income taxes for the year ended December 31, 2017 is based in part on a reasonable estimate of the remeasurement of deferred tax assets and liabilities and the foreign provisions of the Tax Act. The Company recognized a provisional tax amount of $278 million, which is included as a component of provision for income taxes from continuing operations. The Company considers the accounting for the Tax Act’s expense related to remeasurement of tax contingencies to be final and complete. The components of the provisional tax amounts are as follows:

•

The Company recorded a provisional tax amount of $221 million to remeasure certain deferred tax assets and liabilities as a result of the enactment of the Tax Act. The Company is still analyzing certain aspects of the Tax Act and is refining the estimate of the expected reversal of its deferred tax balances. This can potentially affect the measurement of these balances or give rise to new deferred tax amounts. In addition, further guidance from federal and state taxing authorities may change the provisional tax liability or the accounting treatment of the provisional tax liability.

•

The Company recorded a provisional tax amount of $57 million related to the foreign provisions of the Tax Act. This expense is primarily related to a deemed repatriation of the Company’s post-1986 E&P, including the state taxation of the deemed repatriation. The Company has calculated this amount based on reliable estimates but has not yet finalized the calculation of the total post-1986 foreign E&P and the income tax pools for all foreign subsidiaries. In addition, the deemed repatriation tax is calculated, in part, on the amount of E&P held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalizes the amounts held in cash or other specified assets. In addition, further guidance from federal and state taxing authorities may change the provisional tax liability or the accounting treatment of the provisional tax liability. The U.S. federal component of the deemed repatriation tax is payable over an eight-year period.

Accumulated earnings of certain foreign subsidiaries, which totaled $429 million at December 31, 2017, are intended to be permanently reinvested outside the United States. Total foreign accumulated earnings and profits have been subjected to U.S. income tax as a part of the Tax Act. No additional tax expense is expected on the accumulated earnings that are permanently reinvested.

Deferred income tax assets and liabilities result from temporary differences between the assets and liabilities measured for GAAP reporting versus income tax return purposes. Deferred income tax assets and liabilities are measured at the statutory rate of 21% as of December 31, 2017 and 35% as of December 31, 2016. 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,
	2017		2016
	(in millions)
Deferred income tax assets
Liabilities for policyholder account balances, future policy benefits and claims	$	620	$	1,177
Deferred compensation	345		439
Investment related	245		253
Postretirement benefits	34		62
Currency translation adjustments	—		73
Other	66		68
Gross deferred income tax assets	1,310		2,072
Less: valuation allowance	17		11
Total deferred income tax assets	1,293		2,061

Deferred income tax liabilities
Deferred acquisition costs	446		717
Net unrealized gains on Available-for-Sale securities	162		264
Depreciation expense	93		146
Intangible assets	93		126
Deferred sales inducement costs	62		113
Goodwill	52		74
Other	7		2
Gross deferred income tax liabilities	915		1,442
Net deferred income tax assets	$	378	$	619

Included in the Company’s deferred income tax assets are tax benefits primarily related to state net operating losses of $17 million, net of federal benefit, which will expire beginning December 31, 2018. 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 net operating losses and state deferred tax assets; therefore, a valuation allowance of $17 million has been established.

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



	2017			2016			2015
	(in millions)
Balance at January 1	$	115		$	161		$	242
Additions based on tax positions related to the current year	16			15			18
Additions for tax positions of prior years	3			33			48
Reductions for tax positions of prior years	(57		)	(87		)	(147		)
Audit settlements	(1		)	(7		)	—
Balance at December 31	$	76		$	115		$	161

If recognized, approximately $58 million, $46 million and $57 million, net of federal tax benefits, of unrecognized tax benefits as of December 31, 2017, 2016, and 2015, 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 $20 million to $30 million in the next 12 months primarily due to IRS settlements and state exams.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. The Company recognized nil, a net decrease of $43 million, and a net increase of $3 million in interest and penalties for the years ended December 31, 2017, 2016, and 2015, respectively. At both December 31, 2017 and 2016, the Company had a payable of $8 million 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 the third quarter of 2017, the Company received final cash settlements for resolution of the 2006 through 2011 IRS audits. The IRS has completed its examination of the 2008 through 2010 tax returns and these years are effectively settled; however, the statutes of limitation, remain open for certain carryover adjustments. The IRS is currently auditing the Company’s U.S. income tax returns for 2012 through 2015. The Company’s state income tax returns are currently under examination by various jurisdictions for years ranging from 2005 through 2015.