The 31-year-old centre-half leaves the Saddlers after just half a season, making 15 appearances in all competitions. He scored one goal for the club.
Taylor had signed a two-year deal at the Banks's Stadium in the summer after leaving Aberdeen.
However, he now returns to Scotland with Kilmarnock – currently sitting third in the Scottish Championship – and reunites with his former Dons boss, Derek McInnes.
Taylor joins Killie until the summer of 2023 and said: "I’m really excited to join as I know what a great club Kilmarnock is, having played against them in the past, and I can’t wait to get going.
“Everything about Killie is exciting at the moment, especially the challenge to gain promotion back to the Premiership by winning the league."
Taylor added: “The manager was naturally a huge factor in me coming here. I’ve had two spells playing under him, so when I got the call, it was an easy decision to make.”
Walsall said in a brief statement confirming Taylor's departure they 'thank Ash for his efforts and wish him well for the future'.
They appear set to bolster centre-half given his exit and Manny Monthe's ongoing FA ban.