Not only are taxes one of the biggest expenses you'll face in retirement, but figuring out what you will and won't get taxed on can create a major headache.

Adding to the challenge are the special rules around Social Security taxation. Many near-retirees mistakenly believe Social Security income is taxed just like regular income or withdrawals from a retirement account. In fact, the federal government uses a special formula to determine what portion of your Social Security benefits, if any, you'll owe taxes on. And 38 states (soon to be 40) won't tax Social Security at all.

Read on to see how the federal government taxes Social Security income, the 38 states that won't tax benefits, and how you can reduce your taxes in retirement.

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Source Fool.com