INCOME TAXES
Income Tax Expense
Total income tax expense includes:
n Current income tax expense, which represents the amount of federal tax currently payable to or receivable from the Internal Revenue Service, including interest and penalties and amounts accrued for unrecognized tax benefits, if any, and;
n Deferred income tax expense, which represents the net change in the deferred tax asset or liability balance during the year, including any change in the valuation allowance.
Income tax expense excludes the tax effects related to adjustments recorded to other comprehensive income, such as unrealized gains and losses on available-for-sale securities.
The Tax Cuts and Jobs Act enacted in December 2017 reduced the statutory corporate income tax rate from 35% to 21%. Although not effective until January 1, 2018, accounting rules require that we measure our net deferred tax asset using the reduced rate in the period in which the legislation was enacted. Therefore, we reduced our net deferred tax asset by $5.4 billion, with a corresponding charge to deferred income tax expense.
The table below presents the components of our federal income tax expense for 2017, 2016 and 2015. We are exempt from state and local income taxes.
|
| | | | | | | | | | |
| | Year Ended December 31, |
(In millions) | | 2017 | 2016 | 2015 |
Current income tax expense | |
| ($3,436 | ) |
| ($1,037 | ) |
| ($1,243 | ) |
Deferred income tax expense | | (7,773 | ) | (2,787 | ) | (1,655 | ) |
Total income tax expense | |
| ($11,209 | ) |
| ($3,824 | ) |
| ($2,898 | ) |
The increase in income tax expense from 2016 to 2017 is primarily due to the reduction of our net deferred tax asset as a result of the enactment of the Tax Cuts and Jobs Act. The increase in income tax expense from 2015 to 2016 is primarily due to an increase in pre-tax income.
The table below presents the reconciliation between our federal statutory income tax rate and our effective tax rate for 2017, 2016 and 2015.
|
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
(Dollars in millions) | | Amount | Percent | | Amount | Percent | | Amount | Percent |
Statutory corporate tax rate | |
| ($5,892 | ) | 35.0 | % | |
| ($4,074 | ) | 35.0 | % | |
| ($3,246 | ) | 35.0 | % |
Tax-exempt interest | | 39 |
| (0.2 | )% | | 36 |
| (0.3 | )% | | 52 |
| (0.6 | )% |
Tax credits | | 135 |
| (0.8 | )% | | 243 |
| (2.1 | )% | | 346 |
| (3.7 | )% |
Valuation allowance | | (54 | ) | 0.3 | % | | — |
| — |
| | — |
| — |
|
Revaluation of deferred tax asset to enacted rate | | (5,405 | ) | 32.1 | % | | — |
| — |
| | — |
| — |
|
Other | | (32 | ) | 0.2 | % | | (29 | ) | 0.3 | % | | (50 | ) | 0.5 | % |
Effective tax rate | |
| ($11,209 | ) | 66.6 | % | |
| ($3,824 | ) | 32.9 | % | |
| ($2,898 | ) | 31.2 | % |
Deferred Tax Assets, Net
We use the asset and liability method of accounting for income taxes for financial reporting purposes. Under this method, deferred tax assets and liabilities are recognized based upon the expected future tax consequences of existing temporary differences between the financial reporting and the tax reporting basis of assets and liabilities using enacted statutory tax rates as well as tax net operating loss and tax credit carryforwards, if any. To the extent tax laws change, deferred tax assets and liabilities are adjusted in the period that the tax change is enacted. The realization of our net deferred tax assets is dependent upon the generation of sufficient taxable income.
The table below presents the balance of significant deferred tax assets and liabilities at December 31, 2017 and 2016. The valuation allowance relates to capital loss carryforwards included in Other Items, net that we expect to expire unused.
|
| | | | | | | |
| | Year Ended December 31, |
(In millions) | | 2017 | 2016 |
Deferred tax assets: | | | |
Deferred fees | |
| $4,679 |
|
| $6,662 |
|
Basis differences related to derivative instruments | | 2,041 |
| 4,006 |
|
Credit related items and allowance for loan losses | | 291 |
| 1,045 |
|
Basis differences related to assets held for investment | | 1,288 |
| 2,310 |
|
LIHTC partnerships and AMT credit carryforward | | — |
| 2,156 |
|
Other items, net | | 55 |
| 131 |
|
Total deferred tax assets | | 8,354 |
| 16,310 |
|
Deferred tax liabilities: | | | |
Unrealized gains related to available-for-sale securities | | (214 | ) | (492 | ) |
Total deferred tax liabilities | | (214 | ) | (492 | ) |
Valuation Allowance | | (33 | ) | — |
|
Deferred tax assets, net | |
| $8,107 |
|
| $15,818 |
|
Valuation Allowance
A valuation allowance is recorded to reduce the net deferred tax asset when it is more likely than not that all or part of our tax benefits will not be realized. On a quarterly basis, we determine whether a valuation allowance is necessary. In doing so, we consider all evidence available, both positive and negative, in determining whether, based on the weight of the evidence, it is more likely than not that the net deferred tax asset will be realized.
We are not permitted to consider in our analysis the impacts proposed legislation may have on our business because the timing and certainty of those actions are unknown and beyond our control.
Based on all positive and negative evidence available at December 31, 2017, we determined that it is more likely than not that our net deferred tax assets, except for a portion of the deferred tax asset related to our capital loss carryforwards, will be realized.
Unrecognized Tax Benefits and IRS Examinations
We recognize a tax position taken or expected to be taken (and any associated interest and penalties) if it is more likely than not that it will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. We measure the tax position at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. We evaluated all income tax positions and determined that there were no uncertain tax positions that required reserves as of December 31, 2017.