The 33-year-old, whose previous contract was due to expire at the end of this month, will remain a mainstay of the Madridista midfield next year.
Signed by Real Madrid in 2014 from Bayern Munich, Kroos who has 417 appearances for Los Blancos.
According to AS newspaper, the club sees him as a reference for the younger members of the squad such as Aurélien Tchouaméni, Federico Valverde and newcomer Jude Bellingham.
Kroos had hinted on several occasions that his intention was to renew with Real Madrid.
"I said a few weeks ago that everything is on track. Making official announcements is not my job, but it's going very well," the German told a news conference ahead of the Champions League semi-final first leg against Manchester City in May.
In nine seasons at Real Madrid, Kroos has won 20 titles, including four La Liga titles, five Club World Cups and three Spanish Cups.
