NOTE 13: INCOME TAXES

U.S. and foreign components of earnings before income taxes were as follows:



Fiscal year	2016			2015			2014
U.S.		$687			$996			$1,196
Foreign	(3		)	(20		)	(11		)
Earnings before income taxes		$684			$976			$1,185

Income tax expense consists of the following:



Fiscal year	2016			2015			2014
Current income taxes:
Federal		$290			$202			$397
State and local	54			32			61
Foreign	1			—			—
Total current income tax expense	345			234			458
Deferred income taxes:
Federal	(17		)	123			9
State and local	(5		)	23			2
Foreign	7			(4		)	(4		)
Total deferred income tax (benefit) expense	(15		)	142			7
Total income tax expense		$330			$376			$465

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



Fiscal year	2016		2015		2014
Statutory rate	35.0	%	35.0	%	35.0	%
Goodwill impairment	10.1	%	—		—
State and local income taxes, net of federal income taxes	5.1	%	4.1	%	3.8	%
Non-deductible acquisition-related items	0.6	%	0.4	%	0.9	%
Federal credits	(0.6	%)	(0.6	%)	(0.2	%)
Other, net	(2.0	%)	(0.3	%)	(0.3	%)
Effective tax rate	48.2	%	38.6	%	39.2	%

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



	January 28, 2017			January 30, 2016
Compensation and benefits accruals		$209			$194
Allowance for sales returns	76			73
Credit card receivable transaction	13			28
Accrued expenses	39			48
Merchandise inventories	43			35
Gift cards	33			29
Nordstrom Notes	—			24
Federal benefit of state taxes	18			4
Net operating losses	12			7
Gain on sale of interest rate swap	4			9
Other	18			7
Total deferred tax assets	465			458
Valuation allowance	(37		)	(1		)
Total net deferred tax assets	428			457
Land, property and equipment basis and depreciation differences	(258		)	(301		)
Debt exchange premium	(23		)	(23		)
Total deferred tax liabilities	(281		)	(324		)
Net deferred tax assets		$147			$133

As of January 28, 2017, our state and foreign net operating loss carryforwards for income tax purposes were approximately $11 and $37, respectively. As of January 30, 2016, our state and foreign net operating loss carryforwards for income tax purposes were approximately $12 and $23, respectively. The net operating loss carryforwards are subject to certain statutory limitations of the Internal Revenue Code, applicable state laws and applicable foreign laws. If not utilized, a portion of our state and foreign net operating loss carryforwards will begin to expire in 2031 and 2033, respectively. Management believes it is more likely than not that certain state and foreign net operating loss carryforwards and deferred tax assets of foreign subsidiaries will not be realized in the foreseeable future. As such, a valuation allowance of $37 and $1 have been recorded as of January 28, 2017 and January 30, 2016, respectively.

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



Fiscal year	2016			2015			2014
Unrecognized tax benefit at beginning of year		$19			$15			$14
Gross increase to tax positions in prior periods	16			6			9
Gross decrease to tax positions in prior periods	—			(2		)	(2		)
Gross increase to tax positions in current period	2			2			2
Lapses in statute	(5		)	(2		)	(3		)
Settlements	—			—			(5		)
Unrecognized tax benefit at end of year		$32			$19			$15

At the end of 2016 and 2015, $14 and $15 of the ending gross unrecognized tax benefit related to items which, if recognized, would affect the effective tax rate.

There were no significant changes to expense in 2016, 2015 and 2014 for tax-related interest and penalties. At the end of 2016 and 2015, our liability for interest and penalties was $2.

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 2012. Unrecognized tax benefits related to federal, state and local tax positions may decrease by $4 by February 3, 2018, due to the completion of examinations and the expiration of various statutes of limitations.