This was really helpful!
Here is my final .luarc.json at the root of the project
{
"telemetry.enable": false,
"runtime.version": "Lua 5.4",
"runtime.special": {
"import": "require"
},
"runtime.nonstandardSymbol": ["+=", "-=", "*=", "/="],
"diagnostics.globals": [
"playdate",
"json"
],
"diagnostics.disable": ["redefined-local"],
"diagnostics.neededFileStatus": {
"codestyle-check": "Any"
},
"diagnostics.libraryFiles": "Disable",
"completion.callSnippet": "Replace",
"workspace.library": ["$PLAYDATE_SDK_PATH/CoreLibs"],
"workspace.ignoreDir": ["Source/external"]
}