McDonagh has impressed for the Reds after making the switch from Glentoran 12 months ago scoring seven goals and registering a staggering 27 assists in 44 appearances.
He has started this season where he left off the last providing the cross for Ronan Hale to score in the recent Europa Conference League clash with DAC in Slovakia.
McDonagh's new deal sees him remain at Solitude until 2025 at least and McLaughlin labelled the winger as "a dream" for any striker to play alongside.
"We knew we were bringing in a special talent when he first signed him and he showed his quality from the first minute he came in the door,” sthe Reds boss told the club website.
“Jamie’s a player who gets supporters up off their seats and he must be a dream for any striker to play alongside.
"As well as all the assists, he’s also chipped in with a fair few goals of his own, most of which have been pretty spectacular, so extending his stay at the Club is a great bit of business for us and here’s hoping he can be even bigger and better for us in the future.”