Income Taxes

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Abstract]

Income Taxes

Income taxes

JPMorgan Chase and its eligible subsidiaries file a consolidated U.S. federal income tax return. JPMorgan Chase uses the asset and liability method to provide income taxes on all transactions recorded in the Consolidated Financial Statements. This method requires that income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets or liabilities for book and tax purposes. Accordingly, a deferred tax asset or liability for each temporary difference is determined based on the tax rates that the Firm expects to be in effect when the underlying items of income and expense are realized. JPMorgan Chase’s expense for income taxes includes the current and deferred portions of that expense. A valuation allowance is established to reduce deferred tax assets to the amount the Firm expects to realize.

Due to the inherent complexities arising from the nature of the Firm’s businesses, and from conducting business and being taxed in a substantial number of jurisdictions, significant judgments and estimates are required to be made. Agreement of tax liabilities between JPMorgan Chase and the many tax jurisdictions in which the Firm files tax returns may not be finalized for several years. Thus, the Firm’s final tax-related assets and liabilities may ultimately be different from those currently reported.

The components of income tax expense/(benefit) included in the Consolidated Statements of Income were as follows for each of the years ended December 31, 2012, 2011, and 2010.

Income tax expense/(benefit)
Year ended December 31, (in millions)	2012			2011			2010
Current income tax expense
U.S. federal	$	3,225		$	3,719		$	4,001
Non-U.S.	1,782			1,183			2,712
U.S. state and local	1,496			1,178			1,744
Total current income tax expense	6,503			6,080			8,457
Deferred income tax expense/(benefit)
U.S. federal	2,238			2,109			(753		)
Non-U.S.	(327		)	102			169
U.S. state and local	(781		)	(518		)	(384		)
Total deferred income tax expense/(benefit)	1,130			1,693			(968		)
Total income tax expense	$	7,633		$	7,773		$	7,489

Total income tax expense includes $200 million, $76 million and $485 million of tax benefits recorded in 2012, 2011, and 2010, respectively, as a result of tax audit resolutions.

The preceding table does not reflect the tax effect of certain items that are recorded each period directly in stockholders’ equity and certain tax benefits associated with the Firm’s employee stock-based compensation plans. The tax effect of all items recorded directly to stockholders’ equity resulted in a decrease of $1.9 billion in 2012, and increases of $927 million and $1.8 billion in 2011 and 2010, respectively.

U.S. federal income taxes have not been provided on the undistributed earnings of certain non-U.S. subsidiaries, to the extent that such earnings have been reinvested abroad for an indefinite period of time. During 2012, as part of JPMorgan Chase’s ongoing review of the business requirements and capital needs of certain of its non-U.S. subsidiaries and their associated U.S. parent, the Firm determined that the undistributed earnings of certain of its subsidiaries would no longer be indefinitely reinvested. This determination resulted in the establishment of deferred tax liabilities and the recognition of an income tax expense of $80 million associated with prior years’ undistributed earnings. Based on JPMorgan Chase’s ongoing review of the business requirements and capital needs of its non-U.S. subsidiaries, combined with the formation of specific strategies and steps taken to fulfill these requirements and needs, the Firm has determined that the undistributed earnings of certain of its subsidiaries would be indefinitely reinvested to fund current and future growth of the related businesses. As management does not intend to use the earnings of these subsidiaries as a source of funding for its U.S. operations, such earnings will not be distributed to the U.S. in the foreseeable future. For 2012, pretax earnings of approximately $3.1 billion were generated and will be indefinitely reinvested in these subsidiaries. At December 31, 2012, the cumulative amount of undistributed pretax earnings in these subsidiaries approximated $25.1 billion. If the Firm were to record a deferred tax liability associated with these undistributed earnings, the amount would be approximately $5.7 billion at December 31, 2012.

Tax expense applicable to securities gains and losses for the years 2012, 2011 and 2010 was $822 million, $617 million, and $1.1 billion, respectively.

A reconciliation of the applicable statutory U.S. income tax rate to the effective tax rate for each of the years ended December 31, 2012, 2011 and 2010, is presented in the following table.

Effective tax rate
Year ended December 31,	2012		2011		2010
Statutory U.S. federal tax rate	35.0	%	35.0	%	35.0	%
Increase/(decrease) in tax rate resulting from:
U.S. state and local income taxes, net of U.S. federal income tax benefit	1.6		1.6		3.6
Tax-exempt income	(2.9	)	(2.1	)	(2.4	)
Non-U.S. subsidiary earnings(a)	(2.4	)	(2.3	)	(2.2	)
Business tax credits	(4.2	)	(4.0	)	(3.7	)
Other, net	(0.7	)	0.9		(0.2	)
Effective tax rate	26.4	%	29.1	%	30.1	%

(a) Includes earnings deemed to be reinvested indefinitely in non-U.S. subsidiaries.

Deferred income tax expense/(benefit) results from differences between assets and liabilities measured for financial reporting purposes versus income tax return purposes. Deferred tax assets are recognized if, in management’s judgment, their realizability is determined to be more likely than not. If a deferred tax asset is determined to be unrealizable, a valuation allowance is established. The significant components of deferred tax assets and liabilities are reflected in the following table as of December 31, 2012 and 2011.

Deferred taxes
December 31, (in millions)	2012			2011
Deferred tax assets
Allowance for loan losses	$	8,712		$	10,689
Employee benefits	4,308			4,570
Accrued expenses and other(a)	12,393			11,183
Non-U.S. operations	3,537			2,943
Tax attribute carryforwards	1,062			1,547
Gross deferred tax assets(a)	30,012			30,932
Valuation allowance	(689		)	(1,303		)
Deferred tax assets, net of valuation allowance(a)	$	29,323		$	29,629
Deferred tax liabilities
Depreciation and amortization(a)	$	2,563		$	2,799
Mortgage servicing rights, net of hedges (a)	5,336			4,396
Leasing transactions(a)	2,242			2,348
Non-U.S. operations	3,582			2,790
Other, net(a)	4,340			2,520
Gross deferred tax liabilities(a)	18,063			14,853
Net deferred tax assets	$	11,260		$	14,776

(a) The prior period has been revised to conform with the current presentation.

JPMorgan Chase has recorded deferred tax assets of $1.1 billion at December 31, 2012, in connection with U.S. federal and state and local net operating loss carryforwards and foreign tax credit carryforwards. At December 31, 2012, the U.S. federal net operating loss carryforwards were approximately $1.5 billion; the state and local net operating loss carryforward was approximately $269 million; and the U.S. foreign tax credit carryforward was approximately $525 million. If not utilized, the U.S. federal net operating loss carryforwards and the state and local net operating loss carryforward will expire between 2027 and 2030; and the U.S. foreign tax credit carryforward will expire in 2022.

The valuation allowance at December 31, 2012, was due to losses associated with non-U.S. subsidiaries. During 2012, the valuation allowance decreased by $614 million largely related to the realization of state and local tax benefits.

At December 31, 2012, 2011 and 2010, JPMorgan Chase’s unrecognized tax benefits, excluding related interest expense and penalties, were $7.2 billion, $7.2 billion and $7.8 billion, respectively, of which $4.2 billion, $4.0 billion and $3.8 billion, respectively, if recognized, would reduce the annual effective tax rate. Included in the amount of unrecognized tax benefits are certain items that would not affect the effective tax rate if they were recognized in the Consolidated Statements of Income. These unrecognized items include the tax effect of certain temporary differences, the portion of gross state and local unrecognized tax benefits that would be offset by the benefit from associated U.S. federal income tax deductions, and the portion of gross non-U.S. unrecognized tax benefits that would have offsets in other jurisdictions. As JPMorgan Chase is presently under audit by a number of taxing authorities, it is reasonably possible that significant changes in the gross balance of unrecognized tax benefits may occur within the next 12 months. JPMorgan Chase does not expect that any changes over the next 12 months in its gross balance of unrecognized tax benefits caused by such audits would result in a significant change in its annual effective tax rate.

The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2012, 2011 and 2010.

Unrecognized tax benefits
Year ended December 31, (in millions)	2012			2011			2010
Balance at January 1,	$	7,189		$	7,767		$	6,608
Increases based on tax positions related to the current period	680			516			813
Decreases based on tax positions related to the current period	—			(110		)	(24		)
Increases based on tax positions related to prior periods	234			496			1,681
Decreases based on tax positions related to prior periods	(853		)	(1,433		)	(1,198		)
Decreases related to settlements with taxing authorities	(50		)	(16		)	(74		)
Decreases related to a lapse of applicable statute of limitations	(42		)	(31		)	(39		)
Balance at December 31,	$	7,158		$	7,189		$	7,767

After-tax interest expense/(benefit) and penalties related to income tax liabilities recognized in income tax expense were $147 million, $184 million and $(54) million in 2012, 2011 and 2010, respectively.

At December 31, 2012 and 2011, in addition to the liability for unrecognized tax benefits, the Firm had accrued $1.9 billion and $1.7 billion, respectively, for income tax-related interest and penalties.

JPMorgan Chase is continually under examination by the Internal Revenue Service, by taxing authorities throughout the world, and by many states throughout the U.S. The following table summarizes the status of significant income tax examinations of JPMorgan Chase and its consolidated subsidiaries as of December 31, 2012.

December 31, 2012	Periods under examination	Status
JPMorgan Chase – U.S.	2003 - 2005	Field examination completed, JPMorgan Chase intends to file refund claims
JPMorgan Chase – U.S.	2006 - 2010	Field examination
Bear Stearns – U.S.	2006 – 2008	Field examination
JPMorgan Chase – United Kingdom	2006 – 2010	Field examination
JPMorgan Chase – New York State and City	2005 – 2007	Field examination
JPMorgan Chase – California	2006 – 2008	Field examination

The following table presents the U.S. and non-U.S. components of income before income tax expense for the years ended December 31, 2012, 2011 and 2010.

Income before income tax expense - U.S. and non-U.S.
Year ended December 31, (in millions)	2012		2011		2010
U.S.	$	24,895	$	16,336	$	16,568
Non-U.S.(a)	4,022		10,413		8,291
Income before income tax expense	$	28,917	$	26,749	$	24,859

(a) For purposes of this table, non-U.S. income is defined as income generated from operations located outside the U.S.