What is a qualified dividend and why does it get taxed at a lower rate?

Dividends come in two tax flavors. Qualified dividends, which come from most U.S. corporations and many foreign ones and which you've held long enough (generally more than 60 days around the ex-dividend date), are taxed at the lower long-term capital gains rates of 0%, 15%, or 20% depending on your income. Nonqualified (ordinary) dividends, such as those from REITs, certain foreign stocks, or shares held too briefly, are taxed at your regular income tax rate, which is usually higher. The IRS sets these rules, and your broker reports the split on Form 1099-DIV each year. This distinction matters only in taxable accounts; inside an IRA or 401(k) dividends aren't taxed as they're earned. Holding quality funds long-term naturally maximizes the share of your dividends that qualify for the lower rate.