Woodson, entering his second full season coaching the Knicks, led the team to the NBA Atlantic Division title last season with a 54-28 record. He took over the team on an interim basis in March 2012, guided the team to an 18-6 finish and was given the full-time position in May.
Knicks President and General Manager Steve Mills, who took those titles last week, made the announcement Monday.
"I have long respected Mike and think he has done a remarkable job since becoming the head coach of the Knicks," Mills said in a statement. "After spending time with him recently, it is clear that picking up his option is an easy decision."
New York is 72-34 under Woodson. He previous coached at Atlanta for six seasons, advancing to the playoff the last three years and posting a combined record of 206-286.