On his 2017 Federal income tax return, Walter deducted state Critical Thinking income taxes of $8,000 for amounts withheld and estimated tax payments made in 2017 When he filed his 2017 state income tax return in April 2018, 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 2018 estimated tax payment. Walter was not in AMT in 2017.

In preparing his 2018 Federal income tax return, Walter is confused about how he should treat the $1,500. He knows that under the tax benefit rule, he should include the $1,500 in gross income in calculating his regular taxable income. However, because he will 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 2017 had been an AMT year for him. Because it was not, Walter is unsure of the treatment.

Advise Walter on the appropriate treatment of the $1,500 in calculating his 2018 Federal income tax liability