Alan, a cash basis single taxpayer, reported $50,000 of AGI last year and claimed itemized deductions of $15,800, consisting of $14,300 in mortgage interest and $1,500 of state income taxes paid last year. In the current year, he received a $1,000 state tax refund relating to the prior year. What is the proper treatment of the state tax refund?

1. Amend the prior-year's return and reduce the claimed itemized deductions for that year. 2. Include $1,500 in income in the current year. 3. Include $1,000 in income in the current year. 4. Include $3,800 in income in the current year. 5. Include none of the refund in income in the current year.