The Apple Tax Play That Keeps Uncle Sam at Bay
Apple’s stock is near all-time highs and the company’s market value has topped $3 trillion. Yet some of its debt is trading at prices ranging from around 69 cents to 84 cents on the dollar. Typically, such a mismatch would signal a sharp divergence between what stock and bondholders think of a company’s prospects.
In this case, the hobbled debt prices reflect drastic changes in interest-rates. The great interest-rate reset of 2022 caused by the Federal Reserve’s campaign to squash inflation brought carnage to the bond market. That has left debt sold by a wide swath of high-quality companies, and even the U.S.
government, trading at big discounts to its face, or par, value. This brings rare tax-deferral opportunities—and a potential pitfall—to buyers of individual bonds. For higher-income investors, the ability to push taxable income into the future can be a boon, especially if they expect lower overall income in coming years taxed at lower rates.
Many investors aren’t aware of these tax effects because interest rates have fallen for decades and until recently were at superlow levels. In addition, advisers often recommend holding bonds in tax-deferred retirement accounts like IRAs and 401(k)s, because bond interest is taxed at ordinary-income rates. Currently the top federal rate on interest is 40.8%, while the top rate on many stock dividends is 23.8%.
Still, plenty of investors hold individual bonds in taxable accounts, whether for diversification, current income or cash management. With the great rate reset, many can defer tax on a chunk of their returns on purchases of bonds trading at a discount. “The increase in interest rates has caught people by surprise, so they need to know about options they haven’t considered
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