Note D — Income Taxes

The components of income tax expense (benefit) are as follows:

	Year Ended December 31,
In thousands	2013			2012			2011
Current
Federal	$	8,689		$	14,676		$	13,014
State and Local	3,554			3,521			4,696
Foreign	1,189			1,878			2,054
Total Current	$	13,432		$	20,075		$	19,764

Deferred
Federal	$	3,532		$	2,831		$	6,983
State and local	(2,142		)	(1,232		)	(153		)
Foreign	354			(878		)	(117		)
Total Deferred	$	1,744		$	721		$	6,713

Total income tax expense	$	15,176		$	20,796		$	26,477

The U.S. and foreign components of income from continuing operations before income taxes were as follows:

	Year Ended December 31,
In thousands	2013		2012		2011
United States	$	33,143	$	52,287	$	61,810
Foreign	6,474		3,905		6,727
Total income (loss) from continuing operations before income taxes	$	39,617	$	56,192	$	68,537

The differences between total income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate to income before income taxes were as follows:

	Year Ended December 31,
In thousands	2013			Rate		2012			Rate		2011			Rate
Computed expected income tax expense (benefit)	$	13,866		35	%	$	19,667		35	%	$	23,988		35	%
Net effect of state income taxes	918			2	%	2,501			4	%	2,998			4	%
Foreign subsidiary dividend inclusions	1,125			3	%	120			0	%	174			0	%
Foreign tax rate benefit	(570		)	-1	%	(366		)	-1	%	(417		)	-1	%
Change in beginning of year valuation allowance	(87		)	0	%	(1,225		)	-2	%	(117		)	0	%
Other, net	(76		)	0	%	99			0	%	(149		)	0	%
Income tax expense (benefit) for the period	$	15,176		38	%	$	20,796		37	%	$	26,477		39	%

Total income tax expense (benefit) was allocated as follows:

	Year Ended December 31,
In thousands	2013			2012			2011
Continuing operations	$	15,176		$	20,796		$	26,477
Discontinued operations	1,225			(48,959		)	3,298
Loss on sale	(9,047		)	(2,147		)	0
Stockholders’ equity	17,373			(736		)	(5,910		)
Total	$	24,727		$	(31,046	)	$	23,865

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:

	Year Ended December 31,
In thousands	2013			2012
Deferred tax assets
Deferred compensation and retirement plan	$	14,449		$	31,515
Accrued expenses not deductible until paid	4,430			5,459
Employee stock-based compensation	2,561			4,000
Accrued payroll not deductible until paid	2,270			2,363
Accounts receivable, net	1,345			1,963
Other, net	124			158
State income tax	269			69
Federal net operating loss carryforwards	130			151
Foreign net operating loss carryforwards	2,750			2,439
State net operating loss carryfowards	2,037			2,214
Foreign tax credit carryforwards	1,125			0
Capital loss carryforwards	6,713			0
Total gross deferred tax assets	38,203			50,331
Less valuation analysis	(10,744		)	(2,439		)
Net deferred tax assets	$	27,459		$	47,892

Deferred tax liabilities
Property, plant and equipment	$	(7,250	)	$	(11,787	)
Goodwill and other intangibles	(78,301		)	(81,859		)
Total gross deferred tax liabilities	(85,551		)	(93,646		)
Net deferred tax liabilities	$	(58,092	)	$	(45,754	)

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on the expectation of future taxable income and that the deductible temporary differences will offset existing taxable temporary differences, we believe it is more likely than not that we will realize the benefits of these deductible differences, net of the existing valuation allowances, at December 31, 2013 and 2012.

Net deferred taxes are recorded both as a current deferred income tax asset and as other long-term liabilities based upon the classification of the related assets and liabilities that give rise to the temporary difference. There are approximately $19.8 million and $39.7 million of deferred tax assets related to non-current items that are netted with long-term deferred tax liabilities at December 31, 2013 and 2012, respectively.

Harte Hanks or one of our subsidiaries files income tax returns in the U.S. federal, U.S. state and foreign jurisdictions. For U.S. federal, U.S. state and foreign returns, we are no longer subject to tax examinations for years prior to 2009.

A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:

In thousands
Balance at January 1, 2012	$	91
Additions for current year tax positions	0
Additions for prior year tax positions	0
Reductions for prior year tax positions	0
Lapse of statute	(40		)
Settlements	0
Balance at December 31, 2012	$	51

Additions for current year tax positions	$	0
Additions for prior year tax positions	0
Reductions for prior year tax positions	0
Lapse of statute	(24		)
Settlements	0
Balance at December 31, 2013	$	27

Included in the balance as of December 31, 2013 are $0.0 million of federally effected unrecognized tax benefits that, if recognized, would impact the effective tax rate. We anticipate that it is reasonably possible that we will have a reduction in the liability of up to $0.0 million during 2014 as a result of lapsing statutes.

We have elected to classify any interest and penalties related to income taxes within income tax expense in our Consolidated Statements of Comprehensive Income (Loss). We did not recognize any tax benefits for the reduction of accrued interest and penalties associated with the reduction of the liability for unrecognized tax benefits during the year ended December 31, 2013, but recognized $0.1 million during the year ended December 31, 2012. We did not have any interest and penalties accrued at December 31, 2013 or 2012.

As of December 31, 2013, we had net operating loss carryforwards that are available to reduce future taxable income and that will begin to expire in 2029.

The valuation allowance for deferred tax assets as of January 1, 2012, was $3.6 million. The valuation allowance at December 31, 2013 relates to net operating loss, capital loss, and foreign tax credit carryforwards, which are not expected to be realized. The valuation allowance at December 31, 2012 relates only to net operating loss carryforwards. As part of our assessment of the realizability of our deferred tax assets, and based on the expectations of future taxable income and that the deductible temporary differences will offset existing taxable temporary differences, we reduced our January 1, 2012 valuation allowance associated with the Florida Shoppers net operating loss by $1.0 million.

Deferred income taxes have not been provided on the undistributed earnings of our foreign subsidiaries as these earnings have been, and under current plans will continue to be, permanently reinvested in these subsidiaries. As of December 31, 2013, the cumulative undistributed earnings of these subsidiaries were approximately $1.8 million. If those earnings were not considered permanently reinvested, U.S. federal deferred income taxes would have been recorded, after consideration of U.S. foreign tax credits. However, it is not practicable to estimate the amount of additional taxes which may be payable upon distributions.

Cash payments for income taxes were $11.3 million, $13.6 million and $15.5 million in 2013, 2012 and 2011, respectively.