The following table reconciles the total provision for income taxes recorded in the consolidated statements of income with the amounts computed at the statutory federal tax rate for the periods presented below.

TABLE 108: INCOME TAXES



	FOR THE YEAR ENDED DECEMBER 31,
(In Millions)	2019			2018			2017
Federal Rate	21.0		%	21.0		%	35.0		%
Tax at Statutory Rate	$	408.3		$	411.1		$	571.9
Tax Exempt Income	(11.5		)	(6.9		)	(9.6		)
Foreign Tax Rate Differential	4.6			(7.3		)	(50.0		)
Excess Tax Benefit Related to Share-Based Compensation	(17.5		)	(16.8		)	(31.6		)
State Taxes, net	55.0			66.3			40.7
Impact of Tax Cuts and Jobs Act	—			(4.8		)	(53.1		)
Change in Accounting Method	—			(24.4		)	—
Valuation Allowance	29.5			(0.8		)	0.3
Other	(16.5		)	(15.0		)	(33.7		)

Provision for Income Taxes	$	451.9		$	401.4		$	434.9

Income tax expense for the twelve months ended December 31, 2019 and 2018 was $451.9 million and $401.4 million, representing an effective tax rate of 23.2% and 20.5%, respectively. For the twelve months ended December 31, 2019, the provision for income taxes included an increase in the U.S. taxes payable on the income of the Corporation’s non-U.S. branches. This increase included a valuation allowance against deferred tax assets as management believes the foreign tax credit carryforward generated in 2019 will not be fully realized.

For the twelve months ended December 31, 2018, the provision for income taxes included income tax benefits recorded in 2018 associated with the timing of tax deductions for software development-related expenses and the implementation of the Tax Cuts and Jobs Act (TCJA) enacted in the fourth quarter of 2017, partially offset by a change in the earnings mix in tax jurisdictions in which the Corporation operates.

Additionally, the 2017 provision for income taxes included a net benefit attributable to the implementation of the TCJA of $53.1 million and Federal and State research tax credits of $17.6 million related to the Corporation’s technology spend between 2013 and 2016, each resulting in a reduction of the effective tax rate.

The TCJA was enacted on December 22, 2017, and reduced the U.S. federal corporate tax rate from 35% to 21%. It also required companies to pay a mandatory deemed repatriation tax on earnings of foreign subsidiaries that were previously tax deferred. At December 31, 2017, Northern Trust made a reasonable estimate as to the impact of the TCJA. During 2018, Northern Trust completed the related calculations and additional analyses associated with the implementation of the TCJA, resulting in a number of adjustments to the 2018 tax provision as follows:

TABLE 109: IMPACT OF TAX CUTS AND JOBS ACT



(In Millions)	2018			2017
Federal Taxes on Mandatory Deemed Repatriation	$	(16.8	)	$	150.0
Impact Related to Federal Deferred Taxes	12.7			(210.0		)
Other Adjustments	(0.7		)	6.9

Provision (Benefit) for Income Taxes	$	(4.8	)	$	(53.1	)

Adjustments in the above table included a 2018 tax benefit of $16.8 million resulting from an adjustment to the Corporation’s 2017 income tax provision for mandatory deemed repatriation with respect to the pre-2018 earnings of its non-U.S. subsidiaries, offset by a $12.7 million net provision recorded in 2018 associated with the repricing of deferred taxes.

For tax years beginning after December 31, 2017, the TCJA introduces new provisions for U.S. taxation of certain Global Intangible Low-Taxed Income (GILTI). Northern Trust has made the policy election to record any current year tax expense associated with GILTI in the period in which it is incurred.

The Corporation files income tax returns in the U.S. federal, various state, and foreign jurisdictions. The Corporation is no longer subject to income tax examinations by U.S. federal authorities before 2013, U.S. state or local tax authorities for years before 2011, or non-U.S. tax authorities for years before 2012.

Included in Other Liabilities within the consolidated balance sheets at December 31, 2019 and 2018 were $25.3 million and $21.9 million of unrecognized tax benefits, respectively. If recognized, 2019 and 2018 net income would have increased by $22.7 million and $19.8 million, respectively, resulting in a decrease of those years’ effective income tax rates. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



(In Millions)	2019			2018			2017
Balance at January 1	$	21.9		$	27.7		$	17.2
Additions for Tax Positions Taken in the Current Year	0.9			0.5			9.9
Additions for Tax Positions Taken in Prior Years	4.0			1.7			6.2
Reductions for Tax Positions Taken in Prior Years	(1.5		)	(7.8		)	(5.4		)
Reductions Resulting from Expiration of Statutes	—			(0.2		)	(0.2		)

Balance at December 31	$	25.3		$	21.9		$	27.7

Unrecognized tax benefits had net increases of $3.4 million, resulting in a remaining balance of $25.3 million at December 31, 2019, compared to net decreases of $5.8 million resulting in a remaining balance of $21.9 million at December 31, 2018. It is possible that changes in the amount of unrecognized tax benefits could occur in the next 12 months due to changes in judgment related to recognition or measurement, settlements with taxing authorities, or expiration of statute of limitations. Management does not believe that future changes, if any, would have a material effect on the consolidated financial position or liquidity of Northern Trust, although they could have a material effect on operating results for a particular period.

A benefit for interest and penalties of $1.3 million, net of tax, was included in the provision for income taxes for the year ended December 31, 2019. This compares to a provision for interest and penalties of $0.3 million, net of tax, and $0.1 million, net of tax, for the year ended December 31, 2018 and 2017, respectively. As of December 31, 2019 and 2018, the liability for the potential payment of interest and penalties totaled $8.4 million and $9.2 million, net of tax, respectively.



	FOR THE YEAR ENDED DECEMBER 31,
(In Millions)	2019		2018			2017
Current Tax Provision:
Federal	$	216.4	$	132.8		$	347.3
State	50.7		95.4			38.3
Non-U.S.	150.5		162.7			125.4

Total	417.6		390.9			511.0
Deferred Tax Provision:
Federal	$	16.5	$	33.8		$	(96.4	)
State	16.5		(13.8		)	24.6
Non-U.S.	1.3		(9.5		)	(4.3		)

Total	34.3		10.5			(76.1		)

Provision for Income Taxes	$	451.9	$	401.4		$	434.9

Deferred taxes result from temporary differences between the amounts reported in the consolidated financial statements and the tax bases of assets and liabilities. Deferred tax assets and liabilities have been computed as follows:

TABLE 113: NET DEFERRED TAX LIABILITIES



	DECEMBER 31,
(In Millions)	2019			2018
Deferred Tax Liabilities:
Lease Financing	$	36.9		$	43.3
Software Development	249.4			193.2
Accumulated Depreciation	99.8			129.5
Compensation and Benefits	8.3			10.9
State Taxes, net	66.4			58.9
Other Liabilities	206.7			114.5

Gross Deferred Tax Liabilities	667.5			550.3

Deferred Tax Assets:
Allowance for Credit Losses	26.1			29.0
Other Assets	147.0			120.6

Gross Deferred Tax Assets	173.1			149.6

Valuation Reserve	(29.8		)	(0.3		)
Deferred Tax Assets, net of Valuation Reserve	143.3			149.3

Net Deferred Tax Liabilities	$	524.2		$	401.0

Northern Trust had various state net operating loss carryforwards as of December 31, 2019 and 2018. The income tax benefits associated with these loss carryforwards were approximately $1.0 million as of December 31, 2019 and $0.3 million

as of December 31, 2018. A valuation allowance related to the loss carryforwards of $0.3 million was recorded at December 31, 2019 and 2018, as management believes the net operating losses will not be fully realized.

The Corporation generated a foreign tax credit carryforward during the twelve months ended December 31, 2019. A valuation allowance related to the credit carryforward of $29.5 million was recorded at December 31, 2019, as management believes that the foreign tax credit carryforward will not be fully realized.