Federal Income Taxes

12 Months Ended

Dec. 31, 2020

7. Federal Income Taxes

The federal income tax expense (benefit) on continuing operations (in millions) was as follows:



	For the Years Ended December 31,
	2020			2019			2018
Current	$	(61	)	$	181		$	91
Deferred		(15	)		(148	)		153
Federal income tax expense (benefit)	$	(76	)	$	33		$	244

A reconciliation of the effective tax rate differences (in millions) was as follows:



	For the Years Ended December 31,
	2020			2019			2018
Income (loss) before taxes	$	423		$	919		$	1,885
Federal statutory rate		21%			21%			21%
Federal income tax expense (benefit) at federal statutory rate		89			193			396
Effect of:
Tax-preferred investment income⁽¹⁾		(98	)		(99	)		(87	)
Tax credits		(39	)		(40	)		(39	)
Excess tax benefits from stock-based compensation		3			(9	)		(5	)
Tax impact associated with the Tax Cuts and Jobs Act⁽²⁾		(37	)		(17	)		(19	)
Other items		6			5			(2	)
Federal income tax expense (benefit)	$	(76	)	$	33		$	244
Effective tax rate		-18%			4%			13%

⁽¹⁾Relates primarily to separate account dividends eligible for the dividends-received deduction.

⁽²⁾In 2018, we recognized a $27 million tax benefit from the impact of the reduced federal statutory rate under the Tax Cuts and Jobs Act (the “Tax Act”) on our adoption of an Internal Revenue Service pronouncement related to variable annuity contracts. In 2019, we recognized a $17 million tax benefit from the impact of the reduced corporate tax rate under the Tax Act on our election to revalue policyholder tax reserves. In 2020, we recognized a $37 million tax benefit attributable to the carry back of a 2020 net operating loss under the provisions of the Coronavirus Aid, Relief, and Economic Security Act, which provides for a five-year carryback period.

The federal income tax asset (liability) (in millions) was as follows:



	As of December 31,
	2020			2019
Current	$	147		$	60
Deferred		(3,256	)		(2,443	)
Total federal income tax asset (liability)	$	(3,109	)	$	(2,383	)

Significant components of our deferred tax assets and liabilities (in millions) were as follows:



	As of December 31,
	2020			2019
Deferred Tax Assets
Future contract benefits and other contract holder funds	$	2,377		$	643
Reinsurance related embedded derivative asset		82			69
Compensation and benefit plans		212			190
Intangibles		27			26
Tax credits		19			-
Net operating losses		218			216
Other		36			14
Total deferred tax assets	$	2,971		$	1,158
Deferred Tax Liabilities
DAC	$	382		$	813
VOBA		167			194
Net unrealized gain on fixed maturity AFS securities		4,001			2,308
Net unrealized gain on trading securities		90			72
Investment activity		1,249			109
Other		338			105
Total deferred tax liabilities	$	6,227		$	3,601
Net deferred tax asset (liability)	$	(3,256	)	$	(2,443	)

As of December 31, 2020, we have $1.0 billion of net operating losses to carry forward to future years. The net operating losses arose in tax year 2018, and under the Tax Act changes, have an unlimited carryforward period. As a result, management believes that it is more likely than not that the deferred tax asset associated with the loss carryforwards will be realized. Inclusive of the tax attribute for the net operating losses, although realization is not assured, management believes that it is more likely than not that we will realize the benefits of all of our deferred tax assets, and, accordingly, no valuation allowance has been recorded.

We are subject to examination by U.S. federal, state, local and non-U.S. income authorities. With few exceptions for limited scope review, we are no longer subject to U.S. federal examinations for years before 2017. In the first quarter of 2021 the Internal Revenue Service commenced an examination of our refund claims for 2014 and 2015 that is anticipated to be completed by the end of 2021. We are currently under examination by several state and local taxing jurisdictions; however, we do not expect these examinations will materially impact us.

A reconciliation of the unrecognized tax benefits (in millions) was as follows:



	For the Years Ended
	December 31,
	2020		2019
Balance as of beginning-of-year	$	48	$	16
Increases for prior year tax positions		-		32
Increases for current year tax positions		3		-
Balance as of end-of-year	$	51	$	48

As of December 31, 2020 and 2019, $51 million and $48 million, respectively, of our unrecognized tax benefits presented above, if recognized, would have affected our federal income tax expense (benefit) and our effective tax rate. We anticipate that it is reasonably possible that unrecognized tax benefits will decrease by $10 million by the end of 2021.

We recognize interest and penalties accrued, if any, related to unrecognized tax benefits as a component of tax expense. For the years ended December 31, 2020, 2019 and 2018, we recognized no interest and penalty expense (benefit), and there was no accrued interest and penalty expense related to the unrecognized tax benefits as of December 31, 2020 and 2019.