Income Taxes

Due to the reduced statutory tax rate under the New Tax Act, we were required to remeasure our deferred tax assets and liabilities using the lower rate at December 22, 2017, the date of enactment. This re-measurement resulted in a reduction of net deferred tax assets of $35.7 million, which includes a $4.8 million benefit related to deferred taxes previously recognized in accumulated other comprehensive income. In accordance with the SEC's Staff Accounting Bulletin No. 118 ("SAB 118"), the Company has recorded provisional amounts related to the impacts of the New Tax Act, including but not limited to the change in corporate tax rate and immediate expensing of certain capital assets. The amounts are considered provisional estimates due to complexities and ambiguities in New Tax Act which resulted in incomplete accounting for the tax effects of these provisions. Further guidance, either legislative or interpretive, and analysis will be required to complete the accounting for these items. A final determination is required to be made within a measurement period not to extend beyond one year from the enactment date of the New Tax Act. No other provisions of the New Tax Act had a significant impact on our 2017 income tax provisions.

Our federal income tax expense was $35.1 million, $3.5 million and $1.2 million in 2017, 2016 and 2015, respectively. This represents effective tax rates of (1,176.9)%, 64.1% and (61.8)%, respectively. The high negative effective tax rate in 2017 was primarily related to remeasurement under the New Tax Act reform which went into effect on December 22, 2017. The high effective rate in 2016 and 2015 was primarily due to the effect of our uncertain tax position and the nondeductible costs to remediate our tax compliance issues.

The Company holds no valuation allowance in other comprehensive income at December 31, 2017 or 2016.

A reconciliation of federal income tax expense computed by applying the federal income tax rate of 35% in 2017, 2016 and 2015 to income (loss) before federal income tax expense is as follows:



	Years Ended December 31,
	2017					2016					2015
	Amount			%		Amount			%		Amount			%
	(In thousands)
Expected tax expense (benefit)	$	(1,045	)	35.0	%	$	1,919		35.0	%	$	(680	)	35.0	%
Release of valuation allowance previously held in other comprehensive income	—			—		—			—		(42		)	2.2
Taxable stock sales	—			—		263			4.8		—			—
Tax-exempt interest and dividends-received deduction	(360		)	12.1		(553		)	(10.1	)	(746		)	38.4
Adjustment of prior year taxes	68			(2.3	)	29			0.5		(317		)	16.3
Effect of graduated rates	(140		)	4.7		(57		)	(1.0	)	(71		)	3.7
Effect of uncertain tax position	(355		)	11.9		1,672			30.5		1,890			(97.3	)
Nondeductible costs to remediate tax compliance issue	(384		)	12.9		241			4.4		1,152			(59.3	)
Tax reform re-measurement	35,718			(1,196.2	)	—			—		—			—
Goodwill impairment	1,621			(54.3	)	—			—		—			—
Other	18			(0.7	)	—			—		14			(0.8	)
Total income tax expense	$	35,141		(1,176.9	)%	$	3,514		64.1	%	$	1,200		(61.8	)%

Income tax expense consists of:



	Years Ended December 31,
	2017		2016		2015
	(In thousands)
Current	$	14,454	13,348		(2,315	)
Deferred	20,687		(9,834	)	3,515
Total income tax expense	$	35,141	3,514		1,200

The components of deferred federal income taxes are as follows:



	December 31,
	2017			2016
	(In thousands)
Deferred tax assets:
Future policy benefit reserves	$	78,372		123,101
Net operating and capital loss carryforwards	485			—
Accrued expenses	65			104
Investments	6,002			6,837
State income tax credits	—			119
Other	276			56
Total gross deferred tax assets	85,200			130,217
Deferred tax liabilities:
Deferred policy acquisition costs, cost of customer relationships acquired and intangible assets	(25,518		)	(44,709	)
Unrealized gains on investments available-for-sale	(8,297		)	(7,556	)
Accrued policyholder dividends	(441		)	(815	)
Other	(147		)	(268	)
Total gross deferred tax liabilities	(34,403		)	(53,348	)
Net deferred tax asset	$	50,797		76,869

A summary of the changes in the components of deferred federal and state income taxes is as follows:



	December 31,
	2017			2016
	(In thousands)
Deferred federal and state income taxes:
Balance January 1,	$	76,869		67,145
Deferred tax benefit	(20,687		)	9,834
Investments available-for-sale	(5,570		)	(128	)
Effects of unrealized gains on DAC, CCRA and reserves	(103		)	18
Reclassification of MGLIC NOL from current taxes payable	288			—
Balance December 31,	$	50,797		76,869

MGLIC, who is not eligible to join the Company's consolidated tax return until 2020, had a $1.2 million net operating loss carryforward at December 31, 2017, which begin expiring in 2032.

The Company and our subsidiaries had $1.1 million of capital loss carryforwards at December 31, 2017, which will expire, if unused, in 2022.

At December 31, 2017 and 2016, we determined that as a result of our taxable income in carryback periods, tax planning strategies, and the expected reversal of existing deferred tax liabilities, it was more likely than not that the deferred tax assets would be realized.

The Company recognizes only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority.

A reconciliation of unrecognized tax benefits is as follows:



	Years ended December 31,
	2017		2016		2015
	(In thousands)

Balance at January 1,	$	85,762	78,079		81,459
Additions based on tax positions related to the current year	7,384		3,546		3,608
Additions for tax positions of prior years	2,685		4,706		1,570
Reductions for tax positions of prior years	—		(569	)	(8,558	)
Balance December 31,	$	95,831	85,762		78,079

This unrecognized tax benefit is reported net in current federal income tax payable in the Consolidated Statements of Financial Position. Included in these amounts is $6.5 million, $5.7 million and $3.5 million of interest expense with respect to unrecognized tax benefit as of December 31, 2017, 2016 and 2015, respectively.

None of the Company’s unrecognized tax benefits at December 31, 2017 would affect the effective tax rate if recognized. The Company does not believe there is a reasonable possibility the total amount of uncertain tax benefits will significantly increase or decrease in the next twelve months.

The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense. In the Consolidated Statements of Comprehensive Income (Loss), the amount of interest expense recorded was $0.8 million, $2.2 million and $0.4 million for the years ended December 31, 2017, 2016 and 2015, respectively.

The Company's Federal income tax return is filed on a consolidated basis with the following entities:

Citizens, Inc.

CICA Life Insurance Company of America

Security Plan Life Insurance Company

Security Plan Fire Insurance Company

Computing Technology, Inc.

Insurance Investors, Inc.

Citizens National Life Insurance Company

Magnolia Guaranty Life Insurance Company files its Federal income tax return on a stand-alone basis as it is not eligible to join the consolidated group until 2020. CICA Life Ltd., a Bermuda company, is a newly established entity and will file separate tax reporting.

The method of allocation among companies is subject to a written tax sharing agreement, approved by the Board of Directors, whereby allocation is made primarily on a separate return basis with current credit for any net operating losses or other items utilized in the consolidated tax return. Intercompany tax balances are settled quarterly.

The Company and our subsidiaries file income tax returns in the U.S. Federal jurisdiction and various U.S. states. None of our subsidiaries are subject to examination by U.S. tax authorities for years prior to 2014.