How are qualified dividends treated for federal taxes?

Qualified dividends are indeed taxed at long-term capital gains tax rates, which is why this choice is the correct answer.

To provide context, qualified dividends are dividends that meet specific criteria set forth by the Internal Revenue Service (IRS). These dividends must be paid by U.S. corporations or qualified foreign corporations and must be held for a certain period. The advantage of qualified dividends is that they are subject to significantly lower tax rates compared to ordinary income tax rates, which generally apply to regular income—or the standard rate for ordinary dividends that do not qualify.

The rationale behind this favorable treatment is to encourage investment in businesses by providing tax incentives that allow investors to keep more of their returns. The long-term capital gains tax rates can be as low as 0%, 15%, or 20%, depending on the individual taxpayer's income level, while ordinary income rates are generally higher.

In contrast, options suggesting that qualified dividends are taxed as ordinary income or at short-term capital gains rates are inaccurate because those categories of income are generally subject to higher taxation. Additionally, saying that qualified dividends are exempt from federal taxes would be misleading, as they do incur taxes, albeit at reduced rates.