The US president made the announcement to reporters following days of speculation that the retired four-star Marine general was about to resign from his post.
He did not say who would replace Mr Kelly, who he described as a “great guy”, but indicated that a decision would be made in the next day or two.
Mr Trump has previously hinted that Vice President Mike Pence’s chief of staff, Nick Ayers, would be taking up the job. He is believed to be negotiating terms and conditions with Mr Ayers, who has young triplets.
“John Kelly will be leaving, I don’t know if I can say retiring, but he will be leaving at the end of the year,” Mr Trump told reporters on the south lawn of the White House on Saturday.
“We will be announcing who will be taking John’s place... in a day or two. I appreciate his service very much.”
Mr Kelly was brought in to replace Reince Priebus 17 months ago and has been credited with imposing order on a chaotic White House.
However his relationship with the president has reportedly become increasingly strained and he grew increasingly isolated as his influence diminished.
In October he reportedly got into a shouting match with national security adviser John Bolton during a meeting in the Oval Office about the border.
Mr Kelly was also criticised for his handling of allegations against former staff secretary Rob Porter, who was accused by two ex-wives of abuse. He initially defended Mr Porter, but ultimately offered changing accounts of his credibility.
The general’s departure follows the president’s nominations of William Barr as the new attorney general and state department spokeswoman Heather Nauert as the next US ambassador to the United Nations.
Two senior aides, political director Bill Stepien and director of the office of public liaison Justin Clark, have also shifted from the White House to Trump’s campaign.
The reshuffle is believed to reflect Mr Trump’s focus on the 2020 re-election campaign and the challenge of dealing with a Democrat-controlled House of Representatives.
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