Research Problem 4. On his 2012 Federal income tax return, Walter deducted state income taxes of $8,000 for amounts withheld and estimated tax payments made in 2012. When he filed his 2012 state income tax return in April 2013, he discovered that he had overpaid his state income taxes by $1,500. Rather than having the $1,500 refunded to him, he treated it as a 2013 estimated tax payment. The year 2012 was not an AMT year for Walter.

In preparing his 2013 Federal income tax return, Walter is confused about how he should treat the $1,500 in calculating his Federal income tax liability. He knows that under the § 111 tax benefit rule, he should include the $1,500 in gross income in calculating his regular taxable income. However, because he is going to be subject to the AMT, he is uncertain as to how he should treat the $1,500 in calculating AMT. He thinks that the amount could be treated as a negative adjustment in converting taxable income to AMTI if 2012 had been an AMT year. Because it was not, Walter is unsure of the treatment.

Advise Walter on the appropriate treatment of the $1,500 in calculating his 2013 Federal income tax liability.