Clifford, 56, will be the 14th head coach in franchise history. He got his first head coaching job in 2013 with the Charlotte Bobcats, leading the team to a 43-39 record. Clifford posted a 196-214 record in Charlotte before being fired on April 13.
"We are very excited to welcome Steve back into the Magic family,'' Magic president of basketball operations Jeff Weltman said in a release.
"Steve is widely regarded throughout the NBA community as an elite coach and developer of players at all stages. His teams have always been disciplined and prepared and have embraced the concept of playing for each other.''
Clifford was an assistant coach for the Magic from 2007 to 2012. He was on the staff when the Magic went to the 2009 NBA Finals, the 2010 Eastern Conference finals and helped the team win three division titles. The Magic went to the postseason five times during that tenure.
The Magic fired Frank Vogel on April 12 after a 25-57 campaign in 2017. Clifford interviewed twice with the Magic front office, according to the team website. He also met with Magic ownership before accepting the job.
He will be introduced at a news conference on Wednesday afternoon in Orlando.