The 29-year-old returns to the Hatters after scoring eight goals in 23 appearances during the second half of the 2025-26 campaign.
Palmer quickly became one of Jack Wilshere’s standout performers, producing an excellent run of eight goals in 10 League One matches as Luton narrowly missed out on the play-offs on the final day of the season.
He also played a pivotal role in the club’s Vertu Trophy triumph at Wembley in April, helping the Hatters lift silverware.
“I’m so happy to be back, although as everyone has seen from my socials, I’ve never really been away,” he told club webite.
“I loved every minute of my time here last season. The manager, staff, players and fans were unbelievable with me and I felt so welcomed into the Luton Town family. The club has become such a big part of my family, too.
“They have sacrificed and moved all around the country with me over the last ten years, and I’ve had to live away from them for the last couple, but now it’s my turn to move home to be with them.”
He added: “My kids love coming to the Kenny, it’s a special place when everyone is together and I can’t wait to feel that again this season.
“We had some great moments in the last few months, not least lifting the Trophy at Wembley. We’ve won something together and while we were all gutted to miss out on the play-offs, we’re all determined to put it right this season and achieve things together again.”