The department said the price index for consumer spending, the inflation measure favoured by policy-makers at the Federal Reserve, declined 0.1 percent and was unchanged when volatile food and energy prices were stripped out.
Wall Street economists, who had expected personal income to rise 3 percent with spending up 0.9 percent, said the report suggested consumer spending would continue to support a solid economic expansion.
"Consumers had some fire going into 2005, and that should keep the economy going," said Mark Zandi, chief economist at Economy.com in West Chester, Pennsylvania.
Prices for US bonds were little changed in the wake of the data, while the dollar edged down against the euro and yen.
The Microsoft payout also drove disposable income up sharply since individuals were unlikely to pay taxes on their dividends until this year. After-tax income rose by a record 4 percent in December, the department said. When adjusted for inflation, the gain was 4.2 percent, also a record.
The department estimated roughly three-quarters of the $32 billion dividend payment Microsoft counted as personal income and said the payout pushed income up by $24.8 billion.
Wages, which compromise the bulk of personal income, advanced 0.4 percent in December.
The Microsoft dividend pushed the saving rate, the amount of disposable income consumers squirrel away, up sharply to 3.4 percent, the largest since September 2001, when shell-shocked consumers retrenched. Economists said the relatively elevated December saving rate would prove to be a one-off event.