Yeah, Vanguard did it correct. That is how it's supposed to be recorded. It's the terminology that gets confusing to virtually everyone.
Box 1a $$ will properly get added to the total AGI, just like normal capital gains get added to AGI too.
BUT, the 1b $$ are then normally transferred and used on the Qualified Dividends and Capital Gain Tax worksheet when calculating the eventual taxes due. It's on that worksheet that the QuaL Divs are dealt with properly (along with any Cap Gains).
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Occasionally, a couple other tax worksheets are used to calc taxes, but the 1b$$ would be dealt with properly on those too......it's jsut that the Qualified Dividends and Capital Gains Tax Worksheet is most common.
____________*Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or official tax advice.*
