The 40-year-old made the switch to Selhurst Park last January, originally on a temporary basis from Blackpool, signing a permanent deal in the close-season.
Phillips scored the goal that sent Palace back to the Premier League, notching from the penalty spot in May's 1-0 play-off final victory over Watford at Wembley.
Despite having failed to make a start this term, the former Sunderland, Aston Villa and Birmingham City striker ranks the moment as one of the best of his career.
He told the club's official website: "It went well for me at the end of the season and then the play-off final, getting the goal and securing promotion was right up there with one of my highest achievements in football.
"I have to thank the club and the supporters who have been absolutely magnificent to me and welcomed me with open arms from day one. That will stay in my memories for a long time."
Palace manager Tony Pulis said Phillips had proven himself the ultimate professional during his short time working with the forward.
He added: "He is a fantastic professional and there is no way I would stand in the way of what he wants to do.
"He has been brilliant to have around the place in the last few weeks that I have been here and of course he played a major role in getting this club promoted through the play-offs.
"His attitude in and around the rest of the players is first class and you can see why, at 40 years of age, he is still playing in the Premier League. I wish him every success in the future.”