New York City continues to eye opportunities to increase taxes and plug an ever-widening budget gap. Officials kicked off April by proposing a tax on secondary residences valued over $5 million, which could result in raising $500 million or more annually for New York City. Later that same month, they went a step further, seeking to impact residents by limiting the city’s pass-through entity tax (PTET) credit to 75% to raise an additional $1 billion in annual city revenue. A move like this could have a severe impact on high-net-worth taxpayers who reside there, such as owners of private equity firms, professional service firms and hedge funds.
As of the publish date of this article, New York City Governor Hochul appeared to quash the city’s proposed PTET credit reduction. However, it is imperative for taxpayers to be cognizant of, monitor and prepare for this type of unprecedented tax legislation. It may not only adjust future tax policies; it could retroactively unwind the impact of tax policies taxpayers currently rely upon for savings.
Reducing an owner’s PTET benefit is not new, with a handful of states having taken this approach already, such as Connecticut limiting the credit to 87.5% and Massachusetts limiting it to 90%. However, New York City’s proposal went further, limiting the credit to 75%, which would likely make the election less appealing to many pass-through entity owners who reside in the city.
While the legislation is currently stalled, the introduction of it is significant. The entire premise of New York state and city PTET elections — and all PTET elections for that matter — is to provide residents paying high state tax rates with a federal deduction on their state taxes. This is important because after the Tax Cuts and Jobs Act of 2017, residents of high taxing states, such as New York, were no longer able to deduct state tax amounts exceeding $10,000 on their federal tax returns. In 2025, The One Big Beautiful Bill Act (OBBBA) increased the state and local tax deduction to $40,000 for qualifying taxpayers earning income less than $500,000. However, any New York City resident with greater than $500,000 income is still unable to deduct a large portion of their annual state taxes on their federal tax returns absent state and city PTET elections.
PTET elections are currently the only way for New Yorkers to receive a more equal federal tax result compared to residents of lower tax states who are able to use the full state tax deduction.
To understand the significance of such a proposal, let’s look at the following example.
A married filing jointly New York City partnership owner reporting $500,000 of income earned during the year often falls within the 32% federal tax bracket, after the standard deduction and assuming the taxpayer has phased out of the Section 199A deduction. If this resident does not make the New York City PTET election, they would owe approximately $151,000 in federal, state and city income taxes.
If this same owner elects to participate in the New York City PTET, this owner may save approximately $7,600 in federal income taxes. However, if New York City’s proposed credit reduction were approved, this New York City resident would pay the city an additional $4,800 for the privilege of making its PTET election. The owner would see their federal tax benefit reduced by over 60% to only $2,800 on the New York City election.
If the PTET reduction resurfaces, and passes, in New York City, many taxpayers would likely bypass future New York City PTET elections if the cost of compliance does not support the limited federal tax benefit. If these same owners decided to move out of New York City to a state with no income taxes, such as Florida, Texas or Tennessee, they would realize state and city tax savings of nearly $47,000 annually. Many taxpayers have already moved from New York City in search of lower taxes, and legislation such as this could be the final push for some business owners.
Additionally, our analysis only considers the New York City PTET impact. However, if a significant PTET reduction were to pass, it would likely only be a matter of time before the state of New York proposed a similar limitation on the state PTET credit, impacting pass-through owners residing throughout the state.
As we continue to monitor this ongoing situation, talk with your tax advisers directly if you have specific questions.
Contact Hannah Prengler or a member of your service team to discuss this topic further.
In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.