Hi and welcome to Just Answer!
Your general understanding is correct.
However - you will include into your gross income the total amount of settlement- and then separately will deduct attorney fees and other legal expenses.
Generally - you may be able to deduct attorney fees and court costs paid in connection with the civil action on Schedule A (Form 1040). You can only claim these expenses as a miscellaneous itemized deduction
subject to the 2%-of-adjusted-gross-income limit on Schedule A (Form 1040), line 23.However,
you may be able to deduct attorney fees and court costs paid to recover a judgment or settlement for a claim of unlawful discrimination
under various provisions of federal, state, and local law
listed in Internal Revenue Code section 62(e), a claim against the United States government, or a claim under section 1862(b)(3)(A) of the Social Security Act. You can claim this deduction as an adjustment to income on Form 1040, line 36.
I will provide estimation of your possible tax
With taxable income $50k - assuming single, standard deduction, no dependents, no other deductions
or credits - your estimated federal income tax
liability is ~$6200
With additional taxable income $200k - your estimated tax liability $64,000
With $250k - $80,000
With $350k - $115,000
With $695k - $235,000
Please be aware these are very raw estimations.
Let me know if you need any help.
Please be sure to ask for clarification if needed.