We also have an article that may be helpful for you when it comes to taxable settlements. It's posted here for your review.
It sounds like you have reviewed IRS Publication 4345 thoroughly and our awesome Tax Expert @GeorgeM777 has laid out clearly the contents of emotional distress or mental anguish. (Here is the paragraph about that topic.)
- The proceeds you receive for emotional distress or mental anguish attributable to a personal physical injury or physical sickness are treated the same as proceeds received for Personal physical injuries or physical sickness above.
- If the proceeds you receive for emotional distress or mental anguish do not originate from a personal physical injury or physical sickness, you must include them in your income. However, the amount you must include is reduced by:
- (1) amounts paid for medical expenses attributable to emotional distress or mental anguish not previously deducted and (2) previously deducted medical expenses for such distress and anguish that did not provide a tax benefit.
- Attach to your return a statement showing the entire settlement amount less related medical costs not previously deducted and medical costs deducted for which there was no tax benefit. The net taxable amount should be reported as “Other Income” on line 8z of Form 1040, Schedule 1.
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