INCOME TAXES

On December 22, 2017, the President signed the Tax Cuts and Jobs Act (TCJA), a comprehensive tax legislation which, among other things, will reduce the Company's statutory federal income tax rate from 34% to 21% effective January 1, 2018. In addition to the reduction in tax rates, the TCJA makes broad and complex changes to the Internal Revenue Code that will introduce changes to many tax related exclusions, deductions and credits. The Company has recognized the tax effects of the TCJA in the fourth quarter of 2017 and the impact to the Company's Consolidated Financial Statements are described within this footnote.

Under pre-1984 life insurance company tax laws, a portion of NSIC's gain from operations was not subject to current income taxation, but was accumulated for tax purposes in a memorandum account designated "policyholder surplus". The Deficit Reduction Act of 1984 eliminated further additions to policyholder's surplus but under special rules, the aggregate balance in this account ($2,520,000 at December 31, 2017) would be taxed at current rates only if distributed to shareholders or if the account exceeded a prescribed minimum. Due to the special rules, the Company did not previously recognize the deferred tax liability on amounts designated as policyholder surplus. The TCJA repealed the previously enacted special rules and imposed tax on the remaining accumulated balance of the account as of December 31, 2017 to be paid over eight years at 21% beginning in 2018. Due to enactment of the TCJA the Company established a deferred tax liability at December 31, 2017 on the pre-1984 surplus account in the amount of $529,000.

Deferred tax assets and liabilities are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax laws. Due to the enactment of the TCJA, the Company revalued its deferred tax assets and liabilities at December 31, 2017. As a result, the Company recognized $857,000 in income tax expense due to the repeal of a special provision on pre-1984 surplus and a $54,000 income tax benefit due to the change in corporate tax rate from 34% to 21%. Management believes that, based on its historical pattern of taxable income, the Company will produce sufficient income in the future to realize its deferred tax assets. The Company recognized net deferred tax asset positions of $1,487,000 at December 31, 2017 and $2,402,000 at December 31, 2016.

The tax effect of significant differences representing deferred tax assets and liabilities are as follows (dollars in thousands):



	As of December 31, 2017 (21% tax rate)			As of December 31, 2016 (34% tax rate)
General expenses	$	1,069		$	1,685
Unearned premiums	1,269			2,046
Claims liabilities	484			746
AMT credit	1,575			1,230
Impairment on real estate owned	116			187
Unrealized loss on interest rate swaps	128			350
Deferred tax assets	4,641			6,244

Depreciation	(88		)	(135		)
Deferred policy acquisition costs	(1,706		)	(2,839		)
Pre-1984 policyholder surplus account	(529		)	—
Unrealized gains on securities available-for-sale	(831		)	(868		)
Deferred tax liabilities	(3,154		)	(3,842		)
Net deferred tax asset	$	1,487		$	2,402

The appropriate income tax effects of changes in temporary differences are as follows (at 34% with the exception of the impact of the change in tax rate which is calculated at 21%)(dollars in thousands):



	Year ended December 31,
	2017			2016
Deferred policy acquisition costs	$	(77	)	$	(46	)
Unearned premiums	(10		)	(7		)
General expenses	(45		)	(116		)
Depreciation	7			24
Claims liabilities	(38		)	(16		)
Litigation settlement	—			1,748
AMT credit	(345		)	(414		)
Impact of repeal of special provision on pre-1984 policyholder surplus	857			—
Impact of TCJA change in corporate tax rate	(54		)	—
Deferred income tax expense	$	295		$	1,173

Total income tax expense (benefit) varies from amounts computed by applying current federal income tax rates to income or loss before income taxes. The reasons for these differences and the approximate tax effects are as follows:



	Year ended December 31,
	2017		2016
Federal income tax rate applied to pre-tax income/loss	34.0	%	34.0	%
Dividends received deduction and tax-exempt interest	5.8	%	(1.9	)%
Company owned life insurance	3.4	%	0.3	%
Small life deduction	30.7	%	(8.6	)%
Pre-1984 policyholder surplus account at current statutory rate	(76.9	)%	—	%
Impact of change in tax rate under TCJA	4.9	%	—	%
AMT credit	(6.8	)%	—	%
Other, net	(3.1	)%	1.4	%
Effective federal income tax rate	(8.0	)%	25.2	%

The Company recognizes tax-related interest and penalties as a component of tax expense. The Company files income tax returns in the U.S. federal jurisdiction and various states. The Company is not subject to examinations by authorities related to its U.S. federal or state income tax filings for years prior to 2011. Tax returns have been filed through the year 2016.