INCOME TAXES

Income tax expense consists of the following:



Fiscal year	2014			2013		2012
Current income taxes:
Federal		$397			$379		$362
State and local	61			64		66
Total current income tax expense	458			443		428
Deferred income taxes:
Federal	9			9		21
State and local	2			3		1
Foreign	(4		)	—		—
Total deferred income tax expense	7			12		22
Total income tax expense		$465			$455		$450

A reconciliation of the statutory federal income tax rate to the effective tax rate on earnings before income taxes is as follows:



Fiscal year	2014		2013		2012
Statutory rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of federal income taxes	3.8	%	3.6	%	3.6	%
Non-deductible acquisition-related items	0.9	%	—	%	—	%
Other, net	(0.5	%)	(0.3	%)	(0.6	%)
Effective tax rate	39.2	%	38.3	%	38.0	%

In 2014, we acquired Trunk Club in a tax-free merger transaction. Tax adjustments related to a reassessment of our deferred tax assets related to acquisitions resulted in an increase in our effective tax rate in 2014.

The major components of deferred tax assets and liabilities are as follows:



	January 31, 2015			February 1, 2014
Compensation and benefits accruals		$191			$182
Allowance for sales returns	62			56
Accrued expenses	51			48
Allowance for credit losses	29			32
Merchandise inventories	31			28
Gift cards	23			21
Gain on sale of interest rate swap	12			19
Nordstrom Notes	22			18
Federal benefit of state taxes	3			6
Other	4			16
Total deferred tax assets	428			426
Land, property and equipment basis and depreciation differences	(116		)	(98		)
Debt exchange premium	(22		)	(24		)
Total deferred tax liabilities	(138		)	(122		)
Net deferred tax assets		$290			$304

As of January 31, 2015, our state and foreign net operating loss carryforwards for income tax purposes were approximately $3 and $11, respectively. As of February 1, 2014, our federal, state and foreign net operating loss carryforwards for income tax purposes were approximately $4, $24 and $0, respectively. The state net operating loss carryforwards are subject to certain statutory limitations of the Internal Revenue Code and applicable state law. If not utilized, a portion of our state and foreign net operating loss carryforwards will begin to expire in 2031 and 2033, respectively.

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



Fiscal year	2014			2013			2012
Unrecognized tax benefit at beginning of year		$14			$15			$21
Gross increase to tax positions in prior periods	9			3			1
Gross decrease to tax positions in prior periods	(2		)	(1		)	(7		)
Gross increase to tax positions in current period	2			1			1
Lapses in statute	(3		)	—			—
Settlements	(5		)	(4		)	(1		)
Unrecognized tax benefit at end of year		$15			$14			$15

At the end of 2014, 2013 and 2012, $13, $7 and $7 of the ending gross unrecognized tax benefit related to items which, if recognized, would affect the effective tax rate.

Our income tax expense included a decrease to expense of $1 in both 2014 and 2012, and an increase to expense of $1 in 2013, for tax-related interest and penalties. At the end of 2014, 2013 and 2012, our liability for interest and penalties was $2, $7 and $7.

We file income tax returns in the U.S. and a limited number of foreign jurisdictions. With few exceptions, we are no longer subject to federal, state and local, or non-U.S. income tax examinations for years before 2010. Unrecognized tax benefits related to federal, state and local tax positions may decrease by $4 by January 30, 2016, due to the completion of examinations and the expiration of various statutes of limitations.