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Income Taxes | 12 Months Ended
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Dec. 31, 2023
Income Tax Disclosure [Abstract] |
Income Taxes |
NOTE 15—INCOME TAXES
We recognize the current and deferred tax consequences of all transactions that have been recognized in the financial statements using the provisions of the enacted tax laws. Current income tax expense represents our estimated taxes to be paid or refunded for the current period and includes income tax expense related to our uncertain tax positions, as well as tax-related interest and penalties. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We record valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. We record the effect of remeasuring deferred tax assets and liabilities due to a change in tax rates or laws as a component of income tax expense related to continuing operations for the period in which the change is enacted. We release income tax effects stranded in AOCI when an entire portfolio of the type of item is sold, terminated or extinguished. Income tax benefits are recognized when, based on their technical merits, they are more likely than not to be sustained upon examination. The amount recognized is the largest amount of benefit that is more likely than not to be realized upon settlement. The following table presents significant components of the provision for income taxes attributable to continuing operations for the years ended December 31, 2023, 2022 and 2021. Table 15.1: Significant Components of the Provision for Income Taxes Attributable to Continuing Operations
|  | Year Ended December 31,
(Dollars in millions) |  | 2023 |  | 2022 |  | 2021
Current income tax provision: |  |  |  |  |  |
Federal taxes |  | $ | 1,423 |  |  | $ | 2,125 |  |  | $ | 2,173 |
State taxes |  | 382 |  |  | 423 |  |  | 485 |
International taxes |  | 76 |  |  | 104 |  |  | 152 |
Total current provision |  | $ | 1,881 |  |  | $ | 2,652 |  |  | $ | 2,810 |
Deferred income tax provision (benefit): |  |  |  |  |  |
Federal taxes |  | $ | (547) |  |  | $ | (662) |  |  | $ | 490 |
State taxes |  | (145) |  |  | (112) |  |  | 91 |
International taxes |  | (31) |  |  | 2 |  |  | 24 |
Total deferred provision (benefit) |  | (723) |  |  | (772) |  |  | 605 |
Total income tax provision |  | $ | 1,158 |  |  | $ | 1,880 |  |  | $ | 3,415 |
The international income tax provision is related to pre-tax earnings from foreign operations of approximately $230 million, $462 million and $677 million in 2023, 2022 and 2021, respectively. Total income tax provision does not reflect the tax effects of items that are included in AOCI, which include a tax provision of $455 million in 2023, and a tax benefit of $3.2 billion and $985 million in 2022 and 2021, respectively. See “Note 10—Stockholders’ Equity” for additional information. The following table presents the reconciliation of the U.S. federal statutory income tax rate to the effective income tax rate applicable to income from continuing operations for the years ended December 31, 2023, 2022 and 2021. Table 15.2: Effective Income Tax Rate
|  | Year Ended December 31,
|  | 2023 |  | 2022 |  | 2021
Income tax at U.S. federal statutory tax rate |  | 21.0 | % |  | 21.0 | % |  | 21.0 | %
State taxes, net of federal benefit |  | 3.4 |  |  | 3.1 |  |  | 3.1 |
Non-deductible expenses |  | 1.4 |  |  | 0.6 |  |  | 0.4 |
Affordable housing, new markets and other tax credits |  | (6.8) |  |  | (4.2) |  |  | (2.3) |
Tax-exempt interest and other nontaxable income |  | (0.8) |  |  | (0.4) |  |  | (0.3) |
Changes in valuation allowance |  | 0.8 |  |  | 1.0 |  |  | 0.4 |
Other, net |  | 0.2 |  |  | (0.8) |  |  | (0.7) |
Effective income tax rate |  | 19.2 | % |  | 20.3 | % |  | 21.6 | %
The following table presents significant components of our deferred tax assets and liabilities as of December 31, 2023 and 2022. The valuation allowance below represents the adjustment of our foreign tax credit carryforward, certain state deferred tax assets and net operating loss carryforwards to the amount we have determined is more likely than not to be realized. Table 15.3: Significant Components of Deferred Tax Assets and Liabilities
(Dollars in millions) |  | December 31, 2023 |  | December 31, 2022
Deferred tax assets: |  |  |  |
Allowance for credit losses |  | $ | 3,538 |  |  | $ | 3,025 |
Security and loan valuations |  | 2,223 |  |  | 2,497 |
Rewards programs |  | 801 |  |  | 790 |
Net operating loss and tax credit carryforwards |  | 514 |  |  | 437 |
Net unrealized loss on derivatives |  | 470 |  |  | 689 |
Compensation and employee benefits |  | 444 |  |  | 411 |
Lease liabilities |  | 314 |  |  | 346 |
Fixed assets and leases |  | 278 |  |  | 190 |
Partnership investments |  | 272 |  |  | 253 |
Other assets |  | 388 |  |  | 317 |
Subtotal |  | 9,242 |  |  | 8,955 |
Valuation allowance |  | (496) |  |  | (446) |
Total deferred tax assets |  | 8,746 |  |  | 8,509 |
Deferred tax liabilities: |  |  |  |
Right-of-use assets |  | 253 |  |  | 284 |
Original issue discount |  | 121 |  |  | 241 |
Partnership investments |  | 148 |  |  | 119 |
Mortgage servicing rights |  | 85 |  |  | 95 |
Loan Fees & Expenses |  | 48 |  | 52 |
Goodwill and intangibles |  | 57 |  |  | 0 |
Other liabilities |  | 95 |  |  | 59 |
Total deferred tax liabilities |  | 807 |  |  | 850 |
Net deferred tax assets |  | $ | 7,939 |  |  | $ | 7,659 |
Our gross federal net operating loss carryforwards were $7 million and $13 million as of December 31, 2023 and 2022, respectively. These operating loss carryforwards were attributable to acquisitions, and all of $7 million is expected to be utilized. Under IRS rules, our ability to utilize these losses against future income is limited. The net tax values of our state net operating loss carryforwards were $273 million and $267 million as of December 31, 2023 and 2022, respectively, and they will expire from 2024 to 2042. Our foreign tax credit carryforwards were $207 million and $166 million as of December 31, 2023 and 2022, respectively, and they will expire from 2029 to 2033. Our valuation allowance increased by $50 million to $496 million as of December 31, 2023 compared to $446 million as of December 31, 2022. Of the total increase, $41 million is related to the current year increase in our foreign tax credit carryforwards that will not be realized prior to expiration and $8 million is related to reducing state net operating losses and interest carryforwards to the amount we have determined is more likely than not to be realized. We recognize accrued interest and penalties related to income taxes as a component of income tax expense. We recognized a $1 million tax expense in 2023, $1 million and $30 million tax benefit in 2022 and 2021, respectively. The following table presents the accrued balance of tax, interest and penalties related to unrecognized tax benefits. Table 15.4: Reconciliation of the Change in Unrecognized Tax Benefits
(Dollars in millions) |  | Gross Unrecognized Tax Benefits |  | Accrued Interest and Penalties |  | Gross Tax, Interest and Penalties
Balance as of January 1, 2021 |  | $ | 451 |  |  | $ | 46 |  |  | $ | 497 |
Additions for tax positions related to prior years |  | 1 |  |  | 4 |  |  | 5 |
Reductions for tax positions related to prior years due to IRS and other settlements |  | (47) |  |  | (36) |  |  | (83) |
Balance as of December 31, 2021 |  | 405 |  |  | 14 |  |  | 419 |
Additions for tax positions related to the current year |  | 3 |  |  | 0 |  |  | 3 |
Additions for tax positions related to prior years |  | 14 |  |  | 6 |  |  | 20 |
Reductions for tax positions related to prior years due to IRS and other settlements |  | (381) |  |  | (10) |  |  | (391) |
Balance as of December 31, 2022 |  | 41 |  |  | 10 |  |  | 51 |
Additions for tax positions related to the current year |  | 2 |  |  | 0 |  |  | 2 |
Additions for tax positions related to prior years |  | 10 |  |  | 4 |  |  | 14 |
Reductions for tax positions related to prior years due to IRS and other settlements |  | (20) |  |  | (7) |  |  | (27) |
Balance as of December 31, 2023 |  | $ | 33 |  |  | $ | 7 |  |  | $ | 40 |
Portion of balance at December 31, 2023 that, if recognized, would impact the effective income tax rate |  | $ | 27 |  |  | $ | 6 |  |  | $ | 33 |
We are subject to examination by the IRS and other tax authorities in certain countries and states in which we operate. The tax years subject to examination vary by jurisdiction. During 2023, we continued to participate in the IRS Compliance Assurance Process (“CAP”) for our open federal income tax return years and have been accepted into CAP for 2024. During 2023, the IRS continued examining our 2021 federal income tax return for only two issues listed for review post-filing that we expect to be completed by June 30, 2024. We also expect that the IRS review of our 2022 federal income tax return will be completed in 2024. We also expect that the IRS review of our 2023 federal income tax return will be substantially completed in 2024 prior to its filing. It is reasonably possible that further adjustments to the Company’s unrecognized tax benefits may be made within 12 months of the reporting date as a result of future judicial or regulatory interpretations of existing tax laws. At this time, an estimate of the potential changes to the amount of unrecognized tax benefits cannot be made. As of December 31, 2023, the Company had approximately $1.8 billion of unremitted earnings of subsidiaries operating outside the U.S. that upon repatriation would have no additional U.S. income taxes. In accordance with the guidance for accounting for income taxes in special areas, nearly all these earnings are considered by management to be invested indefinitely. As of December 31, 2023, U.S. income taxes of $70 million have not been provided for approximately $287 million of previously acquired thrift bad debt reserves created for tax purposes as of December 31, 1987.

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