Stephenson has also penned a new, long-term contract with Liverpool before moving to Tannadice. He returns to United after last season's successful loan.
Dundee United Manager Jim Goodwin said: “We’re absolutely thrilled to welcome Luca back to Tannadice. He made a tremendous impact last season, not just in terms of performances, but in the mentality and energy he brought to the group every single day.
“Even when he was struggling physically, he gave everything for the badge – that tells you all you need to know about his character.
“Luca’s return was a priority for us this window - he brings something unique in terms of his leadership, versatility and understanding of how we want to play.
The Irishman continued: “He’s come back stronger, fully fit, and hungry to pick up where he left off. He’s had a brilliant summer working under Arne Slot and alongside some of the best players in the world – that experience will serve him and us incredibly well this season.
“Luca knows what this club stands for, the standards expected and the passion of our fanbase. To bring in someone of his quality, who’s already embedded in the culture and values of the club, is a massive boost.”