I live in PA but work in NY (for years). All these years I've enjoyed what's called the "wash" when it comes to local earned income tax at filing time. In other words, the taxes paid to NY offset what I would owe locally and have never had to pay. This year though I get a demanding letter from my township stating that I owe over $800 for 2007. As has been done every year, all the appropriate forms were filed. Would this be a mistake on their part or is there something I should look for in my income that might have triggered this sudden turn of events? Thank you in advance!

When you live in PA but work in NY, then:
1. You file NY tax return as nonresident and pay tax on all the income earned in NY.

2. You also file PA tax return as resident reporting your total income. On the PA tax return, you will claim credit for the taxes paid to NY.

2. You also file PA tax return as resident reporting your total income. On the PA tax return, you will claim credit for the taxes paid to NY.

Appreciate the response and hope you can stick with me for more. You'll note that I wrote "As has been done every year, all the appropriate forms were filed."

What I meant was that all these years, including the last, I have filed the appropriate PA tax return form claiming that credit. And all those years the credit was applied. No entity from PA came banging down my door for owed taxes. But THIS year, there they suddenly are with a threatening "You Owe" letter! If it's not some sort of mistake on their part, what could have changed that I should be noticing? Any clues as to why, if it's not a mistake, their tax bell might have been triggered? OR do you think it's as simple as a goof on their end?

What does the "You Owe" letter says? If it does not have the information, call the state (on telephone number on the letter) and find out why you owe this money. May be you will have to provide them some more information like copy of your NY tax return, letter from your employer that you work in NY.

MukatA is right; the contents of the demand letter should give you some clue as to why they want to be paid NOW after years of filing the same way.

Perhaps the law has changed, or perhaps you failed to provide them a copy of the NY state tax return, or perhaps you provided the copy and they LOST it.

We need more information to provide proper guidance.