Something nobody's mentioned yet - the IRS audit rate has been dropping for years because of budget cuts. They're mostly focused on high-income earners ($500k+) and blatant red flags now. My accountant told me they're primarily using automated matching systems rather than human auditors for most income levels now. So if your W2s and 1099s match what you report, and your deductions aren't wildly out of line with your profession, you're probably not on their radar.

As someone who's been self-employed for 8 years and has never been audited despite claiming substantial business deductions, I can confirm that the under 1% rate is accurate for your income range. The key thing to understand is that the IRS uses algorithms to identify returns with unusual patterns relative to your industry and income level. Your $85k freelance design income with typical business deductions (home office, equipment, software) is completely normal and unlikely to trigger scrutiny. I've learned that audit anxiety often causes people to under-claim legitimate deductions, which actually costs more money than the minimal audit risk. Document everything properly (I use a simple spreadsheet and photo receipts), keep business and personal expenses separate, and claim what you're entitled to. Your friend's audit was likely triggered by something specific in her return - maybe the home office deduction was calculated incorrectly or she couldn't substantiate it with proper documentation. The IRS doesn't audit people for taking standard business deductions that are reasonable for their profession and income level.

One thing to consider is that your cost basis isn't just the purchase price - it also includes certain closing costs and any capital improvements you've made to the property. So your taxable gain might actually be less than the simple difference between purchase and selling price. For example, if you bought at $780k but paid $15k in eligible closing costs and put another $20k into home improvements, your adjusted basis would be $815k. If you sold for $840k, your actual capital gain would only be $25k, not $60k.

Don't forget to keep detailed records of everything! I went through a similar work-related move after 16 months and the IRS actually audited my return (though it worked out fine in the end). Make sure you have documentation for: your employer's written relocation request or transfer letter, proof of the distance between your old workplace and new workplace (Google Maps screenshots work), records of all home improvements with receipts and before/after photos, and copies of all closing documents from both your purchase and eventual sale. The IRS was particularly interested in proving that the move was truly work-related and not voluntary. Having that paper trail saved me a lot of headaches. Also, if your company is paying for any moving expenses, make sure you understand which parts are taxable vs non-taxable - sometimes the moving expense reimbursements can affect your overall tax situation. Given all the advice here about basis adjustments and partial exclusions, it sounds like you'll likely come out just fine tax-wise, but good documentation will give you peace of mind!

Has anyone tried using Credit Karma Tax (now Cash App Taxes)? It's completely free and I've found it does a good job with state tax withholding deductions. I've compared it with both TurboTax and FreeTaxUSA.

I've been doing my own taxes for years and this discrepancy between software is more common than people think. The key thing to understand is that state tax withholding from your W-2 (box 17) is indeed deductible, but only as part of itemized deductions on Schedule A. What's probably happening is that FreeTaxUSA is showing you the itemized calculation upfront, while TurboTax is running both calculations behind the scenes and only showing you the better option. If your total itemized deductions (state taxes + mortgage interest + charitable donations + other qualifying expenses) don't exceed the standard deduction threshold, then you'll get the same final result with both programs. Before you file, I'd recommend manually adding up all your potential itemized deductions to see if you're actually above the standard deduction amount. Also keep in mind the $10,000 SALT cap - if you have significant property taxes on top of your state income tax withholding, that could affect things too.

2 Did your settlement include any punitive damages? That part is definitely taxable! My cousin didn't realize this and ended up with a huge tax bill the following year.

Just went through this myself last year after a car accident settlement. The good news is that most of your settlement should indeed be tax-free! The key thing to look for is how your settlement agreement breaks down the payments. In my case, the settlement document clearly stated amounts for medical expenses, pain and suffering, and property damage - all of which were non-taxable. However, there was a small portion listed as "lost income compensation" that I did have to pay taxes on. One thing that caught me off guard was that my lawyer's fees were deducted from the gross settlement amount, but the IRS still considers the full gross amount as the settlement for tax purposes. So make sure you're looking at the right numbers when determining what's taxable vs non-taxable. Also, definitely get a 1099-MISC if your settlement is over $600 - even though most of it won't be taxable, you'll still need it for your records. My advice is to consult with a tax professional just to be 100% sure, especially since you're dealing with a significant amount of money. Better safe than sorry!

Has anyone used TurboTax to handle this specific situation? I'm in almost the exact same boat (lived in property 3 years, rented 2 years, now selling) and wondering if it correctly handles the 121 exclusion calculation with the rental period exception.

This is such a helpful thread! I'm dealing with a similar situation but with a twist - we lived in our house for 2 years, then moved out and rented it for 1.5 years, then moved BACK in for another year before converting it to a rental again for the past 2 years. From what I'm reading here, it sounds like only that first rental period (the 1.5 years before we moved back) would count as "non-qualified use" since it happened before our final period of primary residence use. The recent 2-year rental period after we moved out for good wouldn't count against the exemption. Does that sound right? This Publication 523 stuff is so confusing with all the back-and-forth living situations. I'm wondering if I should try one of those services mentioned here to get a proper analysis before I make any assumptions about my tax liability.