The Commerce Department said personal incomes grew by 0.5% in July to an annual rate of $8.786 trillion, the biggest increase since a 0.6% gain in December of 2000.
Disposable income -- income minus personal tax and nontax payments -- rose 1.7% in July after a 0.3% gain in June. But the department said that excluding tax rebates, tax rate cuts, and other one-time payments for errors made in government payments, disposable income rose 0.3 percent during the month.
Spending, which has been the strongest factor underpinning the slowing economy, rose only 0.1% last month to a $7.085 trillion annual rate, the lowest monthly gain since a matching 0.1% increase in October of last year.
While consumer spending was down, largely due to a fall-off in spending on durable goods, economists greeted the report as good news.
The tax rebates, the bulk of which will be handed out in August and September, will put more money in consumers' pockets.
"That should be enough to carry the economy through. People have the money to spend and while they are not tearing up the mall spending it they are still out there," said Joel Naroff of Naroff Economic Advisers in Holland, PA.
"I think the back-to-school spending will also be a help," with the start of the school year, he added.
The gain in income was higher than expected. Economists in a Reuters poll forecast, on average, incomes would grow 0.3% while personal consumption would rise 0.2%.
The personal saving rate, which measures saving as a percentage of disposable income, was 2.5% in July compared to 1% in June. It was the highest rate since 2.6% seen in June 1999, the government said.
The personal consumption expenditures index, a key barometer of inflation, fell 0.1% in July after gaining 0.2% in June, leaving little worries of inflation after the Federal Reserve's seven interest rate cuts this year.