The distribution from the IRA account is a taxable income (unless you made any after tax contributions) - so $40,000 distributions should be added to your taxable income.
From unemployment benefits - first $2400 are not taxable - so $18,000 - $2400 = $15,600 should be added to your taxable income.
In additional - if you wife is below 59 1/2 the distribution from the IRA account is a subject of additional 10% penalty.
If your unreimbursed medical expenses exceeded 7.5% of your adjusted gross income - that part of expenses are not a subject of penalty. Also health insurance cost while unemployed may be excluded.Use form - http://www.irs.gov/pub/irs-pdf/f5329.pdf
see exemption codes on page 3 in instructions - http://www.irs.gov/pub/irs-pdf/i5329.pdf
As you purchased a catastrophic health insurance coverage and paid $7,500 for medical services - these are deductible medical expenses and may be claimed on the schedule A - however such deduction is a subject of 7.5% floor limit based on your adjusted gross income (AGI) - see line 1 - http://www.irs.gov/pub/irs-pdf/f1040sa.pdf
legal expenses are generally deductible only if they are in connection with taxable income - thus if the settlement will be your taxable income - legal expenses to get that settlement will be deductible.
I understand your situation - however all damages including 10% additional penalty, lost of retirement savings etc - may be added to your claim and should be discussed with your attorney.
Let me know if you need any help.
Thank you! As things come more into focus I will be in touch. I want to make sure I have all of my W-2's, 10-99's etc. before taking next steps.
My follow-on question will be: How to I finance my tax liability?
That is the main question for the whole life - where from get the money - not just to finance the tax liability.
As long as you did not plan accordingly, did not save funds for that and did not requested withholding - that is the situation.
I might only suggest to pay as much as you can to reduce possible penalties.
If you can borrow for a short term - that might be a good option.
If not paying on time was your honest mistake - you may ask the IRS to forgive penalties - but the interest charges will not be dropped.
Unfortunately - there is no simple solution.