INCOME TAXES

Deferred Income Taxes

Deferred income taxes reflect the impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and such amounts for tax purposes. Primarily due to differences in depreciation rates for federal income tax purposes and for financial reporting purposes, the Company has generated a net deferred tax liability.

Deferred tax (assets) and liabilities comprise the following at December 31 (in millions):



	2012			2011
Excess of tax over book depreciation	$	842		$	795
Other—net	19			17
Gross deferred tax liabilities	861			812

Mileage Plan	(265		)	(242		)
AMT and other tax credits	(1		)	(53		)
Inventory obsolescence	(15		)	(13		)
Deferred gains	(13		)	(14		)
Employee benefits	(230		)	(218		)
Loss carryforwards	—			(13		)
Fuel hedge contracts	(18		)	(3		)
Other—net	(21		)	(27		)
Gross deferred tax assets	(563		)	(583		)
Net deferred tax liabilities	298			229

Current deferred tax asset	(148		)	(134		)
Noncurrent deferred tax liability	446			363
Net deferred tax liability	$	298		$	229

As a result of certain realization requirements of ASC 718, Compensation - Stock Compensation, deferred assets and liabilities did not include certain deferred tax assets at December 31, 2011, that arose directly from the tax deductions related to equity compensation in excess of compensation recognized for financial reporting. Those deferred tax assets included loss carryforwards of $10 million as of December 31, 2011. The Company used ASC 740 ordering for purposes of determining when excess tax benefits have been realized. During 2012, the Company recognized all of the previously unrecognized deferred tax assets related to the excess tax benefits of stock compensation, which decreased "Deferred income taxes" and increased "Capital in excess of par."

The Company has concluded that it is more likely than not that its deferred tax assets will be realizable and thus no valuation allowance has been recorded as of December 31, 2012. This conclusion is based on the expected future reversals of existing taxable temporary differences, anticipated future taxable income, and the potential for future tax planning strategies to generate taxable income, if needed. The Company will continue to reassess the need for a valuation allowance during each future reporting period.

Components of Income Tax Expense

The components of income tax expense were as follows (in millions):



	2012		2011		2010
Current tax expense (benefit):
Federal	$	83	—		$	7
State	11		4		3
Total current	94		4		10

Deferred tax expense:
Federal	94		135		132
State	10		10		13
Total deferred	104		145		145
Total tax expense related to income	$	198	$	149	$	155

Income Tax Rate Reconciliation

Income tax expense reconciles to the amount computed by applying the U.S. federal rate of 35% to income before income tax and accounting change as follows (in millions):



	2012			2011			2010
Income before income tax	$	514		$	394		$	406

Expected tax expense	180			138			142
Nondeductible expenses	3			1			2
State income taxes	14			10			11
Other—net	1			—			—
Actual tax expense	$	198		$	149		$	155

Effective tax rate	38.5		%	37.9		%	38.1		%

Uncertain Tax Positions

The Company has identified its federal tax return and its state tax returns in Alaska, Oregon, and California as “major” tax jurisdictions. A summary of the Company's jurisdictions and the periods that are subject to examination are as follows:



Jurisdiction	Period
Federal	2009 to 2011
Alaska	2009 to 2011
California	2008 to 2011
Oregon	2002 to 2011

The 2002 to 2007 Oregon tax returns are subject to examination only to the extent of net operating loss carryforwards from those years that were utilized in 2010 and later years.

At December 31, 2012, the total amount of unrecognized tax benefits is recorded as a liability, all of which would impact the effective tax rate. Unrecognized tax benefits on uncertain tax positions were not material as of December 31, 2012, 2011 and 2010. No interest or penalties related to these tax positions were accrued as of December 31, 2012.