The extension commits Taylor to the Liberty Stadium club until the end of the 2016 season and comes while he recovers from a long-term injury.
Although he will not play again this season after dislocating and breaking his ankle in three places in the Premier League game against Sunderland on 1 September, the Swans were keen to extend his stay.
As part of his recovery schedule, Taylor recently spent a week at the Football Association's new St George's Park national football centre.
"We spoke about a new contract before I broke my ankle, but when something like that happens you do wonder what will be," Taylor said.
"But in fairness to the chairman (Huw Jenkins) he texted me the day after the injury and told me not to worry about the contract. Full credit to the club, they have been as good as their word.
"Both myself and the club are happy with it. I see my long-term future here - everything is right for me.
"I love the style of football, the area and the fans, who have been great to me. And, more importantly, my family is happy here.
"The club is still on the rise. To reach the dizzy heights of seventh or eighth in the Premier League is amazing, especially when you consider where the club was just seven years ago.
"I am convinced we will still be in the Premier League next season. For a club like ours to have three consecutive campaigns at this level will an unbelievable achievement."
Meanwhile, Swansea have also handed a contract to Welsh youth international Kyle Copp - who has agreed a two-year deal.
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