Transcriptional coactivator with PDZ-binding motif (TAZ) physically interacts with a variety of transcription factors and modulates their activities involved in cell proliferation and mesenchymal stem cell differentiation. TAZ is highly expressed in the kidney, and a deficiency of this protein results in multiple renal cysts and urinary concentration defects; however, the molecular functions of TAZ in renal cells remain largely unknown. In this study, we examined the effects of osmotic stress on TAZ expression and activity in renal cells. We found that hyperosmotic stress selectively increased protein phosphorylation at tyrosine 316 of TAZ and that this was enhanced by c-Abl activation in response to hyperosmotic stress. Interestingly, phosphorylated TAZ physically interacted with nuclear factor of activated T cells 5 (NFAT5), a major osmoregulatory transcription factor, and subsequently suppressed DNA binding and transcriptional activity of NFAT5. Furthermore, TAZ deficiency elicited an increase in NFAT5 activity in vitro and in vivo, which then reverted to basal levels following restoration of wild-type TAZ but not mutant TAZ (Y316F). Collectively, the data suggest that TAZ modulates cellular responses to hyperosmotic stress through fine-tuning of NFAT5 activity via tyrosine phosphorylation.