It's in Spiff FAQ.
In your example wiht Smoke Bombs he would get the benefit of both Fortitude and Smoke Bombs reducing damage by two but the nemesis bonus would increase the damage by one. So if Baron Blade hit Wraith for three and Legacy is the highest then Legacy would ultimately take two damage.
I don't have an exact item form GtG but Spiffs FAQ should cover all this http://www.spiffworld.com/sotm/files/sotm_rules_and_clarifications.pdf
Mecahnically, you always know that a redirect will or can happen. When you redirect, you always reassess all modifiers from the attacker and defender. Does that always make sense? Maybe, maybe not. Sometimes mechanics trump theme to make the game steamlined.
I don’t see this “stop dealing damage, pick the new target, and start a new instance of damage” definition in Spiff’s document.
I do see this, however, under “Redirecting and Modifying Damage:”
Note: a target which is immune to damage or which has reduced incoming damage
to zero may not then redirect the damage, as there is no damage at that point
to redirect.
If the initial target was able to reduce the damage to zero, and that damage is not then redirected, then we seem to be applying the initial target’s modifiers before any change in target happens, as I suggested. That should be consistent in all situations, I would think. So in a case where there IS damage to redirect, the amount redirected takes into account the initial target’s modifiers.
Edit: By the way, I don’t mean to be argumentative, I just want to have a clear citation, since this definition of “redirect” doesn’t match my intuitive definition of the word. If a game needs such a new definition, it should be clear. While Pydro’s damage assessment guide is nice for clarity, now we get to have Pydro citing himself. That just doesn’t satisfy me. Not anything to do with Pydro personally! 
Christopher proof read my post on timing before I posted it.
You are free to play the game however you want. But the official rule to redirection is that you totally reassess any and all damage modifiers. You are free to disregard it while playing your games if you wish
You look at target 1, and access all modifiers to see what damagw would be dealt, then if it qualifies for redirection you redirect it.
When you redirect the damage you start over as if the new target was the target from the beginning. Access all modifiers, including ones that repeat, and excluding ones that applied to the first target, but not the actual target.
So nemesis bonuses, target specific increases and decreases are only going to apply when that specific target is being damaged.
The reason you apply modifiers then redo it all is because you only redirect damage that "would be dealt", if no damage would be dealt then you don't redirect. However when damage is redirected, it isn't a new target taking the other target's hp loss, they use their own defenses, and own weaknesses.
If you redirect kryptonite damage from Superman to Batman, Batman isn't taking the +20 from kryptonite that Superman would have taken.
Ultimately you are free to determine what happens when damage is redirected when playing the tabletop game. However, if you play this in the app it will enforce those rules as they were intended by the game creator. For instance, my group rarely does anything with the nemesis damage but I know in the app I have to account for it.
If you want more proof, Christopher confirms it here when asnwering a different question.
Okay. I’m still new enough around here that I don’t know who around here is authoritative and who isn’t. Please pardon my skepticism.
Interesting how we now have an algorithmic reference, huh? I don’t have the app because I like playing on a table better, but maybe that’s a reason to have it on hand.
You shouldn’t EVER trust me, that happens to an exception.
I'm totally the most authoritative one. No one else will admit it publicly though.
It’s all a question of how your authority benefits us. Can I have a cookie?
Guise is the Super Moderator Admin. I'd trust him for any rulings, especially ones that involve his own cards.
Go ask Silverleaf. She makes all the cookie-related decisions.
That’s a crummy thing to say.
Christopher's powers are broad
you can consider it word of God
he created the game
so consider his name
more authoritative than any one mod
Now THAT, I knew.
Basically you can go by their badges:
Admins are rare creatures, and Admin sightings are things to be treasured.
Moderators we largely ignore, unless it is behavior related, they can ban people and mess with your posts. I think. No one really knows the extent of their powers.
Playtesters generally act knowledgable, but mostly just like to argue amongst themselves, it's best to nod politely then find something else to do while they fight over minutiae.
Anyone with a unique badge is part of the inner circle, you don't have to listen to them, but try to make them think you will. They are sensitive and prone to comedic violence.
Questions are usually resolved by the one known as "app", servant of the mighty mega computer, the source of truth and wisdom.
All hail mega computer