Income Taxes

We use an asset-and-liability approach to account for income taxes. Our objective is to recognize the amount of taxes payable or refundable for the current year through charges or credits to the current tax provision, and to recognize deferred tax assets and liabilities for future tax consequences of temporary differences between amounts reported in our consolidated financial statements and their respective tax bases. The measurement of tax assets and liabilities is based on enacted tax laws and applicable tax rates. The effects of a tax position on our consolidated financial statements are recognized when we believe it is more likely than not that the position will be sustained. A valuation allowance is established if it is considered more likely than not that all or a portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities recorded in our consolidated statement of condition are netted within the same tax jurisdiction.

The following table presents the components of income tax expense (benefit) for the years ended December 31:



(In millions)	2016			2015			2014
Current:
Federal	$	(14	)	$	52		$	59
State	30			92			39
Non-U.S.	320			342			257
Total current expense	336			486			355
Deferred:
Federal	(311		)	(39		)	38
State	38			40			10
Non-U.S.	(85		)	(169		)	12
Total deferred (benefit) expense	(358		)	(168		)	60
Total income tax expense (benefit)	$	(22	)	$	318		$	415

The following table presents a reconciliation of the U.S. statutory income tax rate to our effective tax rate based on income before income tax expense for the years ended December 31:



	2016		2015		2014
U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
Changes from statutory rate:
State taxes, net of federal benefit	2.0		4.2		1.5
Tax-exempt income	(6.1	)	(5.6	)	(5.1	)
Business tax credits⁽¹⁾	(13.6	)	(9.4	)	(6.8	)
Foreign tax differential	(7.7	)	(9.6	)	(8.5	)
Foreign designated earnings	(6.8	)	—		—
Foreign capital transactions	(4.3	)	—		—
Tax refund	—		(2.8	)	—
Litigation expense	1.4		2.7		1.3
Other, net	(0.9	)	(0.7	)	(0.3	)
Effective tax rate	(1.0	)%	13.8	%	17.1	%

⁽¹⁾ Business tax credits include low-income housing, production and investment tax credits.

The 2016 foreign designated earnings include the benefits attributable to the change in designation of certain of our foreign earnings as indefinitely invested overseas. The foreign capital transactions include the tax benefits from incremental foreign tax credits and a foreign affiliate tax loss. The increase in business tax credits is attributable to an increase in alternative energy investments.

In 2015 we recognized benefits associated with the reduction of an Italian deferred tax liability and the approval of a tax refund for prior years, partially offset by a change in New York tax law.

The amount of income tax expense (benefit) related to net gains (losses) from sales of investment securities was $4 million, $(3) million and $5 million in 2016, 2015 and 2014, respectively. Pre-tax income attributable to our operations located outside the U.S. was approximately $1.22 billion, $1.30 billion and $1.33 billion for 2016, 2015 and 2014, respectively.

Pre-tax earnings of our non-U.S. subsidiaries are subject to U.S. income tax when effectively repatriated. As of December 31, 2016, we have chosen to indefinitely reinvest approximately $5.5 billion of earnings of certain of our non-U.S. subsidiaries. No provision has been recorded for U.S. income taxes that could be incurred upon repatriation. As of December 31, 2016, if such earnings had been repatriated to the U.S., we would have provided for approximately $1.1 billion of additional income tax expense.

The following table presents significant components of our gross deferred tax assets and gross deferred tax liabilities as of December 31:



(In millions)	2016			2015
Deferred tax assets:
Unrealized losses on investment securities, net	$	157		$	57
Deferred compensation	285			167
Defined benefit pension plan	116			143
Restructuring charges and other reserves	199			383
Foreign currency translation	225			155
Tax credit carryforwards	425			—
Other	105			32
Total deferred tax assets	1,512			937
Valuation allowance for deferred tax assets	(66		)	(27		)
Deferred tax assets, net of valuation allowance	$	1,446		$	910
Deferred tax liabilities:
Leveraged lease financing	$	313		$	334
Fixed and intangible assets	886			804
Non-U.S. earnings	164			265
Other	120			121
Total deferred tax liabilities	$	1,483		$	1,524

Management considers the valuation allowance adequate to reduce the total deferred tax assets to an aggregate amount that will more likely than not be realized. Management has determined that a valuation allowance is not required for the remaining deferred tax assets because it is more likely than not that there is sufficient taxable income of the appropriate nature within the carryback and carryforward periods to realize these assets.

As of December 31, 2016, we had deferred tax assets associated with tax credit carryforwards of $425 million. Of the total tax credit carryforwards, $406 million expire through 2036 and the remaining do not expire. As of December 31, 2016 and 2015, we had deferred tax assets associated with non-U.S. and state loss carryforwards of $46 million and $26 million, respectively, included in “other” in the table above. Of the total loss carryforwards of $46 million as of December 31, 2016, $31 million do not expire, and the remaining $15 million expire through 2035. The loss carryforwards have a valuation allowance of $38 million and $22 million for 2016 and 2015.

The following table presents activity related to unrecognized tax benefits as of December 31:



(In millions)	2016			2015
Beginning balance	$	63		$	163
Decrease related to agreements with tax authorities	(13		)	(122		)
Increase related to tax positions taken during current year	7			8
Increase related to tax positions taken during prior year	14			14
Ending balance	$	71		$	63

The amount of unrecognized tax benefits that, if recognized, would reduce income tax expense and our effective tax rate was $63 million as of December 31, 2016. Unrecognized tax benefits do not include accrued interest of approximately $5 million and $3 million as of December 31, 2016 and 2015.

It is reasonably possible that the unrecognized tax benefits could decrease by up to $14 million within the next 12 months due to the resolution of various audits, of which $5 million would reduce our income tax expense and our effective tax rate. Management believes that we have sufficient accrued liabilities as of December 31, 2016 for tax exposures and related interest expense.

We recorded interest and penalties related to income taxes as a component of income tax expense. Income tax expense included related interest and penalties of approximately $2 million and $5 million in 2016 and 2015, respectively.