Millions of seniors depend on Social Security to pay their bills and enjoy the retirement they've always dreamed of. But many are also shocked to learn that those benefits are, in fact, taxable in some situations.

But will you have to pay taxes on your benefits? These two questions will give you the answer.

1. What will your annual retirement income amount to?

If Social Security constitutes your only form of retirement income, then there's a good chance you won't have to lose some of your benefits to taxes. But the more income sources you have, the greater your likelihood of paying some taxes on your benefits.

Four Social Security cards in a loose stack

Image source: Getty Images.

To see if your benefits will be taxed at the federal level, you'll need to calculate your provisional income, which is your non-Social Security income (including all tax-free income you collect, such as municipal bond interest, but not including Roth IRA withdrawals, which don't count against you) plus half of your annual benefits. If your total lands between $25,000 and $34,000 as a single tax filer, or between $32,000 and $44,000 as a couple filing a joint tax return, you could be taxed on up to 50% of your benefits.

That's not all. If your provisional income exceeds $34,000 as a single tax filer, or $44,000 as a joint filer, you may be subject to taxes on up to 85% of your benefits. Ouch.

2. What state will you retire in?

As mentioned above, your provisional income will determine whether your Social Security benefits are taxable at the federal level. But these 13 states impose their own tax on those benefits, too:

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • North Dakota
  • Rhode Island
  • Utah
  • Vermont
  • West Virginia

Now many of these states offer an exemption for low or moderate income seniors, so you may get out of those state-level taxes anyway. But Minnesota, North Dakota, Vermont, and West Virginia don't offer an exemption at all.

How to gear up for taxes in retirement

A lot of seniors are caught off-guard when they realize their Social Security income isn't all theirs to keep. That's why it pays to read up on the various income sources you may be privy to that the IRS can get its hands on. These include:

  • Withdrawals from a non-Roth retirement plan
  • Pension income
  • Bond interest (though municipal bond interest is always exempt at the federal level, and sometimes at the state level, too)
  • Interest income
  • Investment gains in a traditional brokerage account

Be sure to do a little tax planning in advance of retirement so you're not overly burdened later in life. For example, if you have your retirement savings in a traditional IRA and worry that your annual withdrawals will push you just over the limit for having your Social Security benefits taxed, you can look at converting that account to a Roth IRA before retirement to avoid that scenario. And that's one just strategic move you might make to lower your tax burden later in life, so it could pay to sit down with a professional and see what other options you have available to you.