Entity information:
Income Taxes
Income tax expense consisted of the following (dollars in millions):
 
For the Years Ended December 31,
 
2017
 
2016
 
2015
Current
 
 
 
 
 
U.S. federal
$
1,056

 
$
1,066

 
$
1,245

U.S. state and local
96

 
149

 
143

Total
1,152

 
1,215

 
1,388

Deferred
 
 
 
 
 
U.S. federal
288

 
45

 
(69
)
U.S. state and local
(2
)
 
3

 
(4
)
Total
286

 
48

 
(73
)
Income tax expense
$
1,438

 
$
1,263

 
$
1,315

 
 
 
 
 
 

The following table reconciles the Company’s effective tax rate to the U.S. federal statutory income tax rate:
 
For the Years Ended December 31,
 
2017
 
2016
 
2015
U.S. federal statutory income tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
U.S. state, local and other income taxes, net of U.S. federal income tax benefits
3.1

 
2.7

 
2.5

Revaluation of net deferred tax assets and other investments due to tax reform(1)
5.1

 
—

 
—

Tax credits
(1.3
)
 
(1.8
)
 
(1.0
)
Other
(1.2
)
 
(1.4
)
 
(0.1
)
Effective income tax rate
40.7
 %
 
34.5
 %
 
36.4
 %
 
 
 
 
 
 

(1)
See Note 3: Investments — Other Investments for a description of these investments.
For the year ended December 31, 2017, income tax expense increased $175 million, or 13.9%, and the effective income tax rate increased 6.2% as compared to the year ended December 31, 2016. The increase in both the effective tax rate and income tax expense is primarily due to the revaluation of net deferred tax assets and certain investments as a result of a reduction in the U.S. federal statutory income tax rate from 35% to 21% under the TCJA. Potential technical corrections and administrative guidance from the Internal Revenue Service (“IRS”) related to the new legislation could result in future adjustments.
Income tax expense decreased $52 million, or 4.0%, and the effective tax rate decreased 1.9% for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The decrease in rates is primarily due to certain tax credits, a settlement with the United States Congress Joint Committee on Taxation (“USCJCT”) and the resolution of certain federal and state tax matters in 2016.
Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. The table below reflects remeasurement based on the tax rate change as result of the TCJA. Valuation allowances are provided to reduce deferred tax assets to an amount that is more likely than not to be realized. The Company evaluates the likelihood of realizing its deferred tax assets by estimating sources of future taxable income and the impact of tax planning strategies. Significant components of the Company’s net deferred income taxes, which are included in other assets in the consolidated statements of financial condition, were as follows (dollars in millions):
 
December 31,
 
2017
 
2016
Deferred tax assets
 
 
 
Allowance for loan losses
$
522

 
$
814

Compensation and benefits
66

 
120

State income taxes
17

 
62

Other
23

 
39

Total deferred tax assets before valuation allowance
628

 
1,035

Valuation allowance
(3
)
 
(2
)
Total deferred tax assets, net of valuation allowance
625

 
1,033

Deferred tax liabilities
 
 
 
Customer fees and rewards
(145
)
 
(214
)
Depreciation and software amortization
(109
)
 
(138
)
Debt exchange premium
(41
)
 
(74
)
Intangibles
(24
)
 
(35
)
Other
(53
)
 
(62
)
Total deferred tax liabilities
(372
)
 
(523
)
Net deferred tax assets(1)
$
253

 
$
510

 
 
 
 

(1)
The change in net deferred tax assets attributable to the TCJA is reflected on the Consolidated Statements of Cash Flows under “Other, net”.

A reconciliation of beginning and ending unrecognized tax benefits is as follows (dollars in millions):
 
For the Years Ended December 31,
 
2017
 
2016
 
2015
Balance at beginning of period
$
158

 
$
286

 
$
635

Additions
 
 
 
 
 
Current year tax positions
9

 
13

 
18

Prior year tax positions
23

 
22

 
2

Reductions
 
 
 
 
 
Prior year tax positions
(41
)
 
(139
)
 
(26
)
Settlements with taxing authorities
(25
)
 
(17
)
 
(5
)
Expired statute of limitations
(1
)
 
(7
)
 
(1
)
Other
 
 
 
 
 
Prior year tax positions(1)
—

 
—

 
(337
)
Balance at end of period(2)
$
123

 
$
158

 
$
286

 
 
 
 
 
 

(1)
Overpayment of taxes in 2013 to 2015 for the timing of deductions resulting from uncertain tax positions for the years 1999 through 2012.
(2)
For the years ended December 31, 2017, 2016 and 2015, amounts included $105 million, $110 million and $138 million respectively, of unrecognized tax benefits, which, if recognized, would favorably affect the effective tax rate.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Interest and penalties related to unrecognized tax benefits were $27 million and $52 million for the years ended December 31, 2017 and 2016, respectively.
The Company is subject to examination by the IRS and tax authorities in various state, local and foreign tax jurisdictions. The Company regularly assesses the likelihood of additional assessments or settlements in each of the taxing jurisdictions resulting from these and subsequent years’ examinations. The 2008-2010 federal audit settlement was approved by USCJCT in December 2017. The final impact did not materially impact the Company’s financial statements. The IRS is currently examining the years 2011-2015. At this time, the potential change in unrecognized tax benefits is not expected to be significant over the next 12 months. The Company believes that its reserves are sufficient to cover any tax, penalties and interest that would result from such examinations.
The Company has an immaterial amount of state net operating loss carryforwards that are subject to a full valuation allowance as of December 31, 2017 and 2016.