Income Taxes
The components of income tax provision were as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
2017 | | 2016 | | 2015 |
(in millions) |
Current income tax |
Federal | $ | 158 |
| | $ | 18 |
| | $ | 234 |
|
State | 1 |
| | 1 |
| | 2 |
|
Total current income tax | 159 |
| | 19 |
| | 236 |
|
Deferred income tax |
Federal | 103 |
| | 6 |
| | (91 | ) |
State | (2 | ) | | (1 | ) | | — |
|
Total deferred income tax | 101 |
| | 5 |
| | (91 | ) |
Total income tax provision | $ | 260 |
| | $ | 24 |
| | $ | 145 |
|
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 $140 million due to the enactment of the Tax Act. The $140 million expense includes a $136 million expense for the remeasurement of deferred tax assets and liabilities to the Tax Act’s statutory rate of 21% and a $4 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 to be provisional amounts based on reasonable estimates as discussed below.
The principal reasons that the aggregate income tax provision 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 Tax Act | 14.0 |
| | — |
| | — |
|
Dividend received deduction | (12.9 | ) | | (17.1 | ) | | (14.0 | ) |
Low income housing tax credits | (7.4 | ) | | (9.4 | ) | | (6.1 | ) |
Foreign tax credit, net of addback | (2.7 | ) | | (3.8 | ) | | — |
|
Taxes applicable to prior years | — |
| | (2.0 | ) | | — |
|
Other, net | — |
| | 0.7 |
| | (0.9 | ) |
Income tax provision | 26.0 | % | | 3.4 | % | | 14.0 | % |
The effective tax rates are lower than the statutory rate as a result of tax preferred items including the dividends received deduction and low income housing credits. The increase in the effective tax rate for the year ended December 31, 2017 compared to 2016 was primarily due to a $140 million expense in 2017 due to provisions of the Tax Act, including remeasurement of net deferred tax assets and remeasurement of tax contingencies. The decrease in the effective tax rate for the year ended December 31, 2016 compared to 2015 was primarily due to lower pretax income in relation to preferred items including the dividends received deduction and low income housing tax credits.
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 under the Tax Act. The Company recognized a provisional tax amount of $140 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 the remeasurement of tax contingencies to be final and complete. The Company recorded a provisional tax amount of $136 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.
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 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 | $ | 599 |
| | $ | 1,144 |
|
Investment related | 251 |
| | 236 |
|
Other | 29 |
| | 13 |
|
Gross deferred income tax assets | 879 |
| | 1,393 |
|
Less: valuation allowance | 11 |
| | 8 |
|
Total deferred income tax assets | 868 |
| | 1,385 |
|
|
Deferred income tax liabilities | | | |
Deferred acquisition costs | 431 |
| | 695 |
|
Net unrealized gains on Available-for-Sale securities | 150 |
| | 251 |
|
Deferred sales inducement costs | 62 |
| | 113 |
|
Depreciation | 13 |
| | 23 |
|
Other | 1 |
| | — |
|
Gross deferred income tax liabilities | 657 |
| | 1,082 |
|
Net deferred income tax assets | $ | 211 |
| | $ | 303 |
|
Included in the Company’s deferred income tax assets are tax benefits related to state net operating losses of $9 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 deferred tax assets, primarily 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:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
(in millions) |
Balance at January 1 | $ | 59 |
| | $ | 95 |
| | $ | 160 |
|
Additions based on tax positions related to the current year | 5 |
| | 6 |
| | 11 |
|
Additions for tax positions of prior years | — |
| | 31 |
| | 29 |
|
Reductions for tax positions of prior years | (50 | ) | | (68 | ) | | (105 | ) |
Settlements | — |
| | (5 | ) | | — |
|
Balance at December 31 | $ | 14 |
| | $ | 59 |
| | $ | 95 |
|
If recognized, approximately $5 million, $6 million and $9 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. Based on the current audit position of the Company, it is estimated that the total amount of gross unrecognized tax benefits may decrease by $9 million to $10 million in the next 12 months due to Internal Revenue Service (“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 a net decrease of $1 million, a net decrease of $39 million, and a net increase of $1 million in interest and penalties for the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017 and 2016, the Company had a payable of $1 million and $2 million, respectively, related to accrued interest and penalties.
The Company or one or more of its subsidiaries files income tax returns as part of its inclusion in the consolidated federal income tax returns of Ameriprise Financial in the U.S. federal jurisdiction and various state jurisdictions. In the third quarter of 2017, the Company received final cash settlements for resolution of the 2006 and 2011 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 or certain of its subsidiaries’ state income tax returns are currently under examination by various jurisdictions for years ranging from 2011 through 2015.