"My issue is what do I do this year when Turbo Tax reports the refund on this years taxes"

When you go to the State and Local Tax Refunds topic for your 2017 tax return, it will show you the refund that it transferred from your 2016 tax return and ask you if the information is correct. You will answer No, and it will then give you the opportunity to say that you did not get a refund. That will eliminate the reporting of the refund.