Does anyone know how it's possible I'm paying close to $2000 in taxes from $6897 in real estate income on schedule from the schedule K-1 Form 1065 I received?

[cm85]

I had completed my taxes and was due for a $450ish refund from federal and $300 from State of Indiana before I add the K-1 income in. After that is factored in, it brings my fed to owe almost $1300 and my state at a $2 refund, about a $2,000 swing. It was the same last year. This seems insane for only $6897 of real state income from the partnership associated with the K1 Form.

[ThomasM · Accepted solution]

The IRS considers your distributive share of partnership income as being income from "self-employment."  Consequently, on that income you'll pay the 15.3% self employment tax as well as income tax.

So if you're in, say, the 15% tax bracket, then $6897 in SE income will generate over $2000 in tax, though you do get to deduct half the SE tax from your gross income (thus saving you 15% of the amount deducted, in that bracket).

That's how IRS taxes SE income.