Is the cover letter something official or just a note explaining things? And should it go inside the envelope or attached to the front of the forms?

It's just a simple note explaining your amendment - nothing official. Something like "Enclosed is my amended 2024 state tax return to include a previously omitted 1099 form for interest income." It should definitely go inside the envelope, usually on top of your forms. I usually just write it on plain paper with my name, address, and tax ID number at the top, then a brief paragraph explaining what changed and why. Makes it easier for the processing folks to route your return correctly and understand what they're looking at. Keep it short and straightforward!

Learned this the hard way too. Also worth checking if your state requires any specific forms for amendments beyond just marking the "amended return" box on the regular form. My state (PA) has a completely separate form you have to include.

Exactly! And some states want you to include a copy of your original return along with the amended one, while others specifically say NOT to include the original. The requirements vary so much state by state.

The settlement letter doesn't mention punitive damages, but there is a line that says "including interest accrued" with a dollar amount. So I'm guessing that part is definitely taxable? And good point about previous medical deductions, though we didn't claim any related to this issue.

Yes, the interest portion is definitely taxable - the IRS is very clear about that. You'll need to report that specific amount separately as interest income on Schedule B. It might even be reported to you on a 1099-INT, though not all companies handle the reporting correctly. For the remainder of the settlement, since medical expenses weren't previously deducted, you won't have any "tax benefit rule" complications. That's good news! Still, I'd recommend documenting your reasoning for how you allocated the remaining amount between taxable and non-taxable portions. Written documentation of your good-faith determination can be very helpful if questions arise later.

TurboTax is terrible for settlements. In my experience, you need to use the "Other Income" section and then override their default treatment. There should be a way to enter "negative other income" for the portion that's not taxable. I ended up switching to FreeTaxUSA which handled it better.

14 Did you have any issues with credit card statements showing purchases in both states during the "transition period"? I traveled back to my old state several times after moving for work and I'm worried that might cause problems.

22 Traveling back to your old state after moving shouldn't cause problems as long as you have clear documentation of your permanent residence change. In my case, I continued to make purchases in my old state for about 2 months after officially moving because I was finishing up a project there. The auditor was primarily concerned with establishing when my legal residence changed. The lease documents and utility connections were the most important evidence. Just make sure you can show a clear timeline of when your permanent residence shifted from one state to another, and temporary visits back to your old state won't matter for tax purposes.

17 Remote work makes it complicated! Generally, you pay taxes based on where you physically perform the work, not where your employer is located. So if you moved to State B but were working remotely for an employer in State A, you typically owe taxes to State B once you're living there.

Do you think the CPA could get in trouble if OP reports him to the state board? My tax guy messed up some stuff too and I'm wondering if I should report him.

Yes, CPAs are licensed professionals who can face disciplinary action from their state boards for substandard work. The severity depends on whether this was a simple mistake or represents a pattern of incompetence. Before formal reporting, I'd recommend clearly documenting the errors in writing and giving the CPA an opportunity to correct the issues or adjust their fee. Most licensing boards want to see that you attempted to resolve the issue directly first. If they're dismissive or refuse to acknowledge clear errors (like taxing unrealized gains), then reporting becomes more appropriate. Make sure you keep copies of all communications and the incorrect tax documents to support your complaint.

I tried a couple different options but ended up using Koinly for tracking all the transactions and calculating the gains/losses. It was pretty intuitive for importing from different exchanges. Then I just took those totals and put them into FreeTaxUSA for the actual filing. The whole process was definitely time-consuming upfront but now that I understand it, next year should be much easier. I also created a detailed spreadsheet where I documented everything so I have backup records. The most annoying part was figuring out the staking rewards since they count as income at the fair market value when received. The tax software I used makes it pretty clear where to report everything.

Thanks for sharing that! That's exactly what I was worried about. Did your brother have to file an amended return or did the IRS just send him a bill?

The IRS sent him a CP2000 notice showing the discrepancy and their calculation of what he owed. He had the option to dispute it or agree and pay. Since it was legitimate income he hadn't reported, he just paid the amount. It wasn't catastrophic, but definitely more expensive and stressful than if he'd just reported it correctly the first time. The peace of mind from doing it right is worth the extra effort now.

This is great advice. I had a similar issue and found out the payroll records were being maintained by a third-party processor even though the business was gone. Might be worth checking if you know what payroll service they used.