Income Taxes

The components of deferred income taxes at December 31, 2017 and 2016 are as follows:



	2017			2016
Deferred tax assets relating to:
Retirement benefits	$	210.7		$	362.9
Accrued expenses	278.6			331.9
Insurance reserves	136.5			229.5
Net operating loss carryforwards	3.7			9.2
Bad debt reserves	128.4			119.6
State income tax	32.7			59.8
Deferred compensation	23.7			38.2
Investment basis difference	23.9			42.4
Other	81.5			110.5
Total deferred tax assets	919.7			1,304.0
Deferred tax liabilities relating to:
Unrealized gains on securities	174.9			202.9
Intangible assets:
Trademarks and state Medicaid licenses	1,528.5			2,547.6
Customer, provider and hospital relationships	186.0			194.1
Internally developed software and other amortization differences	324.1			450.5
Retirement benefits	170.2			267.3
Debt discount	27.6			60.8
State deferred tax	104.5			106.0
Depreciation and amortization	41.5			54.1
Other	88.9			200.6
Total deferred tax liabilities	2,646.2			4,083.9
Net deferred tax liability	$	(1,726.5	)	$	(2,779.9	)

Significant components of the provision for income taxes for the years ended December 31, 2017, 2016 and 2015 consist of the following:



	2017			2016		2015
Current tax expense:
Federal	$	1,355.9		$	1,862.6	$	1,996.6
State and local	39.5			93.9		133.0
Total current tax expense	1,395.4			1,956.5		2,129.6
Deferred tax (benefit) expense	(1,274.4		)	129.1		(58.6		)
Total income tax expense	$	121.0		$	2,085.6	$	2,071.0

State and local current tax expense is reported gross of federal benefit, and includes amounts related to audit settlements, uncertain tax positions, state tax credits and true up of prior years’ tax. Such items are included in multiple lines in the following rate reconciliation table on a net of federal tax basis.

A reconciliation of income tax expense recorded in the consolidated statements of income and amounts computed at the statutory federal income tax rate for the years ended December 31, 2017, 2016 and 2015 is as follows:



	2017					2016					2015
	Amount			Percent		Amount			Percent		Amount			Percent
Amount at statutory rate	$	1,387.3		35.0	%	$	1,594.4		35.0	%	$	1,620.9		35.0	%
State and local income taxes net of federal tax expense/benefit	(2.2		)	(0.1	)	61.5			1.4		75.3			1.6
Tax exempt interest and dividends received deduction	(57.9		)	(1.4	)	(61.7		)	(1.4	)	(63.2		)	(1.3	)
HIP Fee	—			—		411.7			9.0		422.6			9.1
Tax Cuts and Jobs Act	(1,108.3		)	(27.9	)	—			—		—			—
Other, net	(97.9		)	(2.5	)	79.7			1.8		15.4			0.3
Total income tax expense	$	121.0		3.1	%	$	2,085.6		45.8	%	$	2,071.0		44.7	%

On December 22, 2017, the federal government enacted a tax bill, H.R.1, An act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, or the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act contains significant changes to corporate taxation, including, but not limited to, reducing the U.S. federal corporate income tax rate from 35% to 21% and modifying or limiting many business deductions. At December 31, 2017, we had not completed our accounting for the tax effects resulting from the enactment of the Tax Cuts and Jobs Act; however, we have made a reasonable estimate of the effects on our existing deferred tax balances. We remeasured deferred tax assets and liabilities based on the rates at which they are expected to be utilized in the future, which is generally 21%. However, we are still analyzing certain aspects of the Tax Cuts and Jobs Act and refining our calculations, which could potentially affect the measurement of those balances or give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our deferred tax balance was a benefit of $1,108.3, or $4.14 per diluted share, and is included as a component of income tax expense.

During the year ended December 31, 2016, we recognized income tax expense of $411.7, or $1.54 per diluted share, as a result of the non-tax deductibility of the HIP Fee payments.

During the year ended December 31, 2015, we recognized income tax expense of $422.6, or $1.55 per diluted share, as a result of the non-tax deductibility of the HIP Fee payments. We also recognized income tax expense of $42.3, or $0.16 per diluted share, as a result of an adverse California franchise tax ruling. This expense is allocated between the "state and local income taxes net of federal tax benefit" and the "other, net" line items in the table above.

The change in the carrying amount of gross unrecognized tax benefits from uncertain tax positions for the years ended December 31, 2017 and 2016 is as follows:



	2017			2016
Balance at January 1	$	131.1		$	212.0
Additions based on:
Tax positions related to current year	2.6			—
Tax positions related to prior years	83.4			13.9
Reductions based on:
Tax positions related to current year	—			(1.1		)
Tax positions related to prior years	(18.5		)	(88.4		)
Settlements with taxing authorities	(9.0		)	(5.3		)
Balance at December 31	$	189.6		$	131.1

The table above excludes interest, net of related tax benefits, which is treated as income tax expense (benefit) under our accounting policy. The interest is included in the amounts described in the following paragraph.

As of December 31, 2017, $174.8 of unrecognized tax benefits would impact our effective tax rate in future periods, if recognized. Also included in the table above is $2.4 that would be recognized as an adjustment to additional paid-in capital, which would not affect our effective tax rate. In addition to the contingent liabilities included in the table above, during 2017 we filed protective state income tax refund claims of approximately $309.5.

For the years ended December 31, 2017, 2016 and 2015, we recognized net interest expense (benefits) of $3.0, $6.6 and $(1.8), respectively. We had accrued approximately $21.9 and $18.9 for the payment of interest at December 31, 2017 and 2016, respectively.

As of December 31, 2017, as further described below, certain tax years remain open to examination by the Internal Revenue Service, or IRS, and various state and local authorities. In addition, we continue to discuss certain industry issues with the IRS. As a result of these examinations and discussions, we have recorded amounts for uncertain tax positions. It is anticipated that the amount of unrecognized tax benefits will change in the next twelve months due to possible settlements of audits and changes in temporary items. However, the ultimate resolution of these items is dependent on the completion of negotiations with various taxing authorities. While it is difficult to determine when other tax settlements will actually occur, it is reasonably possible that one could occur in the next twelve months and our unrecognized tax benefits could change within a range of approximately $(5.1) to $(117.4).

We are a member of the IRS Compliance Assurance Process, or CAP. The objective of CAP is to reduce taxpayer burden and uncertainty while assuring the IRS of the accuracy of tax returns prior to filing, thereby reducing or eliminating the need for post-filing examinations.

As of December 31, 2017, the IRS examination of our 2017 tax year continues to be in process. During 2017, the examination of our 2016 tax year was resolved with the IRS.

In certain states, we pay premium taxes in lieu of state income taxes. Premium taxes are reported with general and administrative expense.

At December 31, 2017, we had unused federal tax net operating loss carryforwards of approximately $10.6 to offset future taxable income. The loss carryforwards expire in the years 2018 through 2036. During 2017, 2016 and 2015, federal income taxes paid totaled $1,502.7, $1,665.2 and $1,952.1, respectively.