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 periods indicated:



	Years Ended December 31,
(In millions)	2017			2016			2015
Current:
Federal	$	229		$	(14	)	$	52
State	18			30			92
Non-U.S.	380			320			342
Total current expense	627			336			486
Deferred:
Federal	49			(311		)	(39		)
State	65			38			40
Non-U.S.	(19		)	(85		)	(169		)
Total deferred expense (benefit)	95			(358		)	(168		)
Total income tax expense (benefit)	$	722		$	(22	)	$	318

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 periods indicated:



	Years Ended December 31,
	2017		2016		2015
U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
Changes from statutory rate:
State taxes, net of federal benefit	1.9		2.0		4.2
Tax-exempt income	(4.5	)	(6.1	)	(5.6	)
Business tax credits⁽¹⁾	(6.8	)	(13.6	)	(9.4	)
Foreign tax differential	(7.4	)	(7.7	)	(9.6	)
Transition tax	15.7		—		—
Deferred tax revaluation	(6.8	)	—		—
Foreign designated earnings	(0.7	)	(6.8	)	—
Foreign capital transactions	—		(4.3	)	—
Tax refund	—		—		(2.8	)
Litigation expense	—		1.4		2.7
Other, net	(1.5	)	(0.9	)	(0.7	)
Effective tax rate	24.9	%	(1.0	)%	13.8	%

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

On December 22, 2017, the President signed into law the TCJA (H.R. 1), reducing the corporate income tax rate from 35% to 21% and enacting a one-time transition tax on unremitted earnings of foreign subsidiaries. Although we have not completed accounting for the tax effects of the TCJA, we included a provisional estimate for the impact to deferred tax balances and cost associated with the one-time transition tax.

As a result of the reduction in the corporate income tax rate, certain U.S. deferred tax assets and liabilities were revalued resulting in a provisional estimated deferred tax benefit of $197 million. Deferred tax assets and liabilities represent the future impact on income taxes resulting from temporary differences that exist as of the balance sheet date using enacted tax rates. Certain U.S. temporary differences are a provisional estimate based on information currently available. As additional information is made available, there may be adjustments to temporary differences that could increase or decrease the deferred tax balances. As such, the $197 million benefit may be adjusted in future periods.

The one-time transition tax is measured on total post-1986 earnings and profits ("E&P") of foreign subsidiaries previously deferred from U.S. income taxes. Although we have not completed our analysis of cumulative E&P, we have included a provisional expense of $454 million based on information available and our current interpretations of the newly enacted law. This amount is based on the amount of earnings held in cash and other specified assets. We understand that this amount will change as estimates of foreign E&P and foreign income taxes are refined and assumptions are modified from additional guidance on the TCJA.

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 following table presents significant components of our gross deferred tax assets and gross deferred tax liabilities as of the dates indicated:



	December 31,
(In millions)	2017			2016
Deferred tax assets:
Unrealized losses on investment securities, net	$	17		$	157
Deferred compensation	159			285
Defined benefit pension plan	82			116
Restructuring charges and other reserves	132			199
Foreign currency translation	18			225
General business credit	231			425
NOL and other carryforwards	101			73
Other	27			32
Total deferred tax assets	767			1,512
Valuation allowance for deferred tax assets	(88		)	(66		)
Deferred tax assets, net of valuation allowance	$	679		$	1,446
Deferred tax liabilities:
Leveraged lease financing	$	184		$	313
Fixed and intangible assets	755			886
Non-U.S. earnings	6			164
Investment basis differences	158			120
Total deferred tax liabilities	$	1,103		$	1,483

The reduction in deferred tax assets and liabilities includes the provisional estimated impact of TCJA as well as current year activity such as the utilization of General Business Credits, additional investments in tax advantaged investments and changes in FX rates.

The table below summarizes the deferred tax assets and related valuation allowances recognized as of December 31, 2017:



(In millions)	Deferred Tax Asset		Valuation Allowance			Expiration
General business Credits	$	231	$	—		2035-2037
NOLs - Non-U.S.	47		(35		)	2018-2026 / None
Other Carryforwards	41		(41		)	None
NOLs - State	13		(12		)	2018-2036

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 carryforward periods to realize these assets.

At December 31, 2017, 2016 and 2015, the gross unrecognized tax benefits, excluding interest, were $94 million, $71 million, and $63 million, respectively. Of this, the amounts that would reduce the effective tax rate, if recognized, are $87 million, $63 million and $55 million, respectively. Unrecognized tax benefits do not include the benefit of the federal deduction for unrecognized state tax benefits which is included in the effective tax rate.

The following table presents activity related to unrecognized tax benefits as of the dates indicated:



	December 31,
(In millions)	2017			2016			2015
Beginning balance	$	71		$	63		$	163
Decrease related to agreements with tax authorities	(14		)	(13		)	(122		)
Increase related to tax positions taken during current year	26			7			8
Increase related to tax positions taken during prior years	11			14			14
Ending balance	$	94		$	71		$	63

It is reasonably possible that of the $94 million of unrecognized tax benefits as of December 31, 2017, up to $14 million could decrease within the next 12 months due to the resolution of various audits. Management believes that we have sufficient accrued liabilities as of December 31, 2017 for tax exposures and related interest expense.

Income tax expense included related interest and penalties of approximately $3 million and $2 million in 2017 and 2016, respectively. Total accrued interest and penalties are approximately $8 million, $5 million and $3 million as of December 31, 2017, 2016 and 2015, respectively.