7. Federal Income Taxes

The federal income tax expense (benefit) on continuing operations (in millions) was as follows:



	For the Years Ended December 31,
	2018		2017			2016
Current	$	91	$	210		$	88
Deferred		153		(1,159	)		178
Federal income tax expense (benefit)	$	244	$	(949	)	$	266

A reconciliation of the effective tax rate differences (in millions) was as follows:



	For the Years Ended December 31,
	2018			2017			2016
Tax rate times pre-tax income (loss)	$	396		$	396		$	510
Effect of:
Tax-preferred investment income		(87	)		(280	)		(196	)
Tax credits		(39	)		(29	)		(28	)
Change in uncertain tax positions		1			(17	)		(14	)
Excess tax benefits from share-based compensation		(5	)		(12	)		(8	)
Goodwill impairment		-			316			-
Deferred tax impact from the Tax Cuts and Jobs Act		(19	)		(1,322	)		-
Other items		(3	)		(1	)		2
Federal income tax expense (benefit)	$	244		$	(949	)	$	266
Effective tax rate		13%			-84%			18%

The effective tax rate is the ratio of tax expense (benefit) over pre-tax income (loss). Tax-preferred investment income as reflected above relates primarily to the separate account dividends-received deduction, which generated a total tax benefit of $84 million, $264 million and $182 million for the years ended December 31, 2018, 2017 and 2016, respectively. As a result of the Tax Act, the recorded tax benefit for the separate account dividends-received deduction was substantially less in our 2018 income tax provision as compared to prior years. The current year also includes a tax benefit from the impact of the reduced corporate tax rate under the Tax Act on our adoption of a recent Internal Revenue Service pronouncement related to variable annuity contracts.

As a result of the enactment of the Tax Act on December 22, 2017, we remeasured our existing deferred tax balances at the 21% marginal corporate income tax rate and recognized a $1.3 billion tax benefit in 2017. The SEC previously issued rules that allow for a one-year measurement period after the enactment of the Tax Act to finalize calculations and recording of the related tax impacts. Subsequent to the enactment date, we completed our review of the provisions of the Tax Act, including the impact of the reduction in the U.S. federal corporate income tax rate and the impact of specific life insurance provisions on our financial statements.

The federal income tax asset (liability) (in millions) was as follows:



	As of December 31,
	2018			2017
Current	$	(24	)	$	(35	)
Deferred		(1,158	)		(2,095	)
Total federal income tax asset (liability)	$	(1,182	)	$	(2,130	)

Significant components of our deferred tax assets and liabilities (in millions) were as follows:



	As of December 31,
	2018			2017
Deferred Tax Assets
Future contract benefits and other contract holder funds	$	649		$	795
Reinsurance related embedded derivative asset		1			12
Compensation and benefit plans		179			182
Intangibles		40			-
Tax credits		-			76
Net operating losses		264			-
Other		56			7
Total deferred tax assets	$	1,189		$	1,072
Deferred Tax Liabilities
DAC	$	1,339		$	1,080
VOBA		305			108
Net unrealized gain on AFS securities		338			1,643
Net unrealized gain on trading securities		27			41
Intangibles		-			9
Investment activity		332			96
Other		6			190
Total deferred tax liabilities	$	2,347		$	3,167
Net deferred tax asset (liability)	$	(1,158	)	$	(2,095	)

As of December 31, 2018, we had no remaining deferred tax assets related to tax credits; however, we have $1.3 billion of net operating losses to carry forward to future years. Although realization is not assured, management believes that it is more likely than not that we will realize the benefits of our deferred tax assets, and, accordingly, no valuation allowance has been recorded.

As of December 31, 2018 and 2017, $16 million and $11 million, respectively, of our unrecognized tax benefits presented below, if recognized, would have affected our federal income tax expense (benefit) and our effective tax rate. We are not aware of any events for which it is likely that unrecognized tax benefits will significantly increase or decrease within the next year. A reconciliation of the unrecognized tax benefits (in millions) was as follows:



	For the Years Ended
	December 31,
	2018		2017
Balance as of beginning-of-year	$	11	$	1
Increases for prior year tax positions		-		9
Increases for current year tax positions		5		1
Balance as of end-of-year	$	16	$	11

We recognize interest and penalties accrued, if any, related to unrecognized tax benefits as a component of tax expense. For the years ended December 31, 2018, 2017 and 2016, we recognized interest and penalty expense (benefit) related to uncertain tax positions of zero, zero and $(3) million, respectively. There was no accrued interest and penalty expense related to the unrecognized tax benefits as of December 31, 2018 and 2017.

We are subject to examination by U.S. federal, state, local and non-U.S. income authorities. We are currently not under examination by the Internal Revenue Service; however, tax years 2015 and forward remain open under the applicable statute of limitations. We are currently under examination by several state and local taxing jurisdictions; however, we do not expect these examinations will materially impact us.