INCOME TAXES

Income Tax Summary

DTE Energy files a consolidated federal income tax return. DTE Electric is a part of the consolidated federal income tax return of DTE Energy. DTE Energy and its subsidiaries file consolidated and/or separate company income tax returns in various states and localities, including a consolidated return in the State of Michigan. DTE Electric is part of the Michigan consolidated income tax return of DTE Energy. The federal, state and local income tax expense for DTE Electric is determined on an individual company basis with no allocation of tax expenses or benefits from other affiliates of DTE Energy. DTE Electric had income tax receivables with DTE Energy of $9 million and $6 million at December 31, 2016 and 2015, respectively.

The Registrants' total Income Tax Expense varied from the statutory federal income tax rate for the following reasons:



	2016			2015			2014
DTE Energy	(In millions)
Income Before Income Taxes	$	1,105		$	950		$	1,275
Income tax expense at 35% statutory rate	$	387		$	333		$	446
Production tax credits	(145		)	(122		)	(119		)
Investment tax credits	(5		)	(7		)	(6		)
Depreciation	(4		)	(4		)	(4		)
Noncontrolling Interests	12			2			(2		)
AFUDC Equity	(10		)	(8		)	(7		)
Employee Stock Ownership Plan dividends	(5		)	(5		)	(4		)
Subsidiary stock loss	(10		)	—			—
State and local income taxes, net of federal benefit	58			35			51
Enactment of New York Corporate Income Tax Legislation, net of federal benefit	—			—			8
Other, net	(7		)	6			1
Income Tax Expense	$	271		$	230		$	364
Effective income tax rate	24.5		%	24.2		%	28.5		%



	2016			2015			2014
DTE Electric	(In millions)
Income Before Income Taxes	$	975		$	836		$	830
Income tax expense at 35% statutory rate	$	341		$	293		$	291
Production tax credits	(30		)	(31		)	(22		)
Investment tax credits	(4		)	(5		)	(5		)
Depreciation	3			3			3
AFUDC Equity	(6		)	(7		)	(7		)
Employee Stock Ownership Plan dividends	(3		)	(3		)	(3		)
Domestic production activities deduction	—			—			(2		)
State and local income taxes, net of federal benefit	56			43			43
Other, net	(4		)	(1		)	—
Income Tax Expense	$	353		$	292		$	298
Effective income tax rate	36.2		%	34.9		%	35.9		%

Components of the Registrants' Income Tax Expense were as follows:



	2016			2015			2014
DTE Energy	(In millions)
Current income tax expense (benefit)
Federal	$	(1	)	$	(3	)	$	(16	)
State and other income tax	7			(4		)	24
Total current income taxes	6			(7		)	8
Deferred income tax expense
Federal	184			178			289
State and other income tax	81			59			67
Total deferred income taxes	265			237			356
	$	271		$	230		$	364



	2016		2015			2014
DTE Electric	(In millions)
Current income tax expense (benefit)
Federal	$	—	$	(26	)	$	(19	)
State and other income tax	11		(2		)	20
Total current income taxes	11		(28		)	1
Deferred income tax expense
Federal	268		252			251
State and other income tax	74		68			46
Total deferred income taxes	342		320			297
	$	353	$	292		$	298

Deferred tax assets and liabilities are recognized for the estimated future tax effect of temporary differences between the tax basis of assets or liabilities and the reported amounts in the Consolidated Financial Statements.

The Registrants' deferred tax assets (liabilities) were comprised of the following at December 31:



	DTE Energy						DTE Electric
	2016			2015			2016			2015
	(In millions)
Property, plant, and equipment	$	(4,596	)	$	(4,211	)	$	(3,702	)	$	(3,468	)
Securitized regulatory assets	—			5			—			5
Tax credit carry-forwards	643			465			116			53
Pension and benefits	(324		)	(301		)	(222		)	(193		)
Federal net operating loss carry-forward	190			177			42			142
State and local net operating loss carry-forwards	59			63			1			16
Investments in equity method investees	(109		)	(82		)	—			—
Other	11			(4		)	(28		)	(53		)
	(4,126		)	(3,888		)	(3,793		)	(3,498		)
Less valuation allowance	(36		)	(35		)	—			—
Long-term deferred income tax liabilities	$	(4,162	)	$	(3,923	)	$	(3,793	)	$	(3,498	)

Deferred income tax assets	$	1,463		$	1,088		$	569		$	453
Deferred income tax liabilities	(5,625		)	(5,011		)	(4,362		)	(3,951		)
	$	(4,162	)	$	(3,923	)	$	(3,793	)	$	(3,498	)

Tax credit carry-forwards for DTE Energy include $359 million of general business credits that expire from 2034 through 2036 and $284 million of alternative minimum tax credits that may be carried forward indefinitely. The alternative minimum tax credits are production tax credits earned prior to 2006 but not utilized. The majority of these alternative minimum tax credits were generated from projects that had received a private letter ruling (PLR) from the IRS. These PLRs provide assurance as to the appropriateness of using these credits to offset taxable income, however, these tax credits are subject to IRS audit and adjustment. No valuation allowance is required for the tax credits carry-forward deferred tax asset.

DTE Energy has a federal net operating loss carry-forward of $544 million as of December 31, 2016, which will expire from 2035 through 2036. No valuation allowance is required for the federal net operating loss deferred tax asset.

DTE Energy has state and local deferred tax assets related to net operating loss carry-forwards of $59 million and $63 million at December 31, 2016 and 2015, respectively. The state and local net operating loss carry-forwards expire from 2017 through 2036. DTE Energy has recorded valuation allowances at December 31, 2016 and 2015 of approximately $36 million and $35 million, respectively, with respect to these deferred tax assets. In assessing the realizability of deferred tax assets, DTE Energy considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

Tax credit carry-forwards for DTE Electric include $116 million of general business credits that expire from 2035 through 2036. No valuation allowance is required for the tax credits carry-forward deferred tax asset.

DTE Electric has a federal net operating loss carry-forward of $120 million as of December 31, 2016, which will expire in 2035. No valuation allowance is required for the federal net operating loss deferred tax asset.

DTE Electric has state and local deferred tax assets related to net operating loss carry-forwards of $1 million at December 31, 2016, while there was $16 million state and local deferred tax asset related to net operating loss carry-forwards at December 31, 2015. No valuation allowance is required for DTE Electric's state and local net operating loss carry-forwards.

The above tables exclude unamortized investment tax credits that are shown separately on the Registrants' Consolidated Statements of Financial Position. Investment tax credits are deferred and amortized to income over the average life of the related property.

Uncertain Tax Positions

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



	2016		2015			2014
DTE Energy	(In millions)
Balance at January 1	$	3	$	9		$	10
Additions for tax positions of prior years	7		—			—
Lapse of statute of limitations	—		(6		)	(1		)
Balance at December 31	$	10	$	3		$	9



	2016		2015		2014
DTE Electric	(In millions)
Balance at January 1	$	4	$	4	$	4
Additions for tax positions of prior years	9		—		—
Balance at December 31	$	13	$	4	$	4

DTE Energy had $7 million and $2 million of unrecognized tax benefits at December 31, 2016 and 2015, respectively, that, if recognized, would favorably impact its effective tax rate. DTE Energy does not anticipate any material decrease in unrecognized tax benefits in the next twelve months.

DTE Electric had $8 million and $3 million of unrecognized tax benefits at December 31, 2016 and 2015, respectively, that, if recognized, would favorably impact its effective tax rate. DTE Electric does not anticipate any material decrease in unrecognized tax benefits in the next twelve months.

The Registrants recognize interest and penalties pertaining to income taxes in Interest expense and Other expenses, respectively, on their Consolidated Statements of Operations.

Accrued interest pertaining to income taxes for DTE Energy totaled $3 million and $1 million at December 31, 2016 and 2015, respectively. DTE Energy recognized interest expense related to income taxes of $2 million in 2016 and a nominal amount in 2015 and 2014. DTE Energy had accrued no penalties pertaining to income taxes.

Accrued interest pertaining to income taxes for DTE Electric totaled $4 million and $1 million at December 31, 2016 and 2015, respectively. DTE Electric recognized interest expense related to income taxes of $3 million in 2016 and a nominal amount in 2015 and 2014. DTE Electric had accrued no penalties pertaining to income taxes.

In 2016, DTE Energy, including DTE Electric, settled a federal tax audit for the 2014 tax year. DTE Energy's federal income tax returns for 2015 and subsequent years remain subject to examination by the IRS. DTE Energy's Michigan Business Tax and Michigan Corporate Income Tax returns for the year 2008 and subsequent years remain subject to examination by the State of Michigan. DTE Energy also files tax returns in numerous state and local jurisdictions with varying statutes of limitation.