Tax Advice

Members of the Maryland Association of Certified Public Accountants are answering readers' tax questions through April 15.In 1997, my employer withheld $4,000 state income taxes. My 1997 state income tax liability was $3,000. I itemized my federal tax deductions for 1997 and I used $3,000 as my state income tax. I received a refund of $1,000 from the state in 1998. My tax adviser claims that I must show the $1,000 refund as 1998 income and pay federal taxes on it. I disagree. Can you explain?