The 21-year-old singer announced the news during the show's weekly red carpet arrivals on Wednesday night (18 December).
Speaking to The Hollywood Reporter, Demi said: "I started the show being a singer and a musician, and so I'm going to go back to that.
"It's been really great, but I'm so excited for 2014. I'm going to dedicate it completely and entirely to music – touring and making a new album."
Demi also said that she would miss working alongside her fellow female judges, Kelly Rowland and Paulina Rubio the most.
Demi, who joined the show in 2012, has been a judge and mentor on the singing competition for two series.
The former Disney star, who recently featured on hit musical series, Glee, will begin her 'Neon Lights' tour in February, supported by Cher Lloyd, Little Mix and Fifth Harmony.
Music mogul and X Factor boss Simon Cowell, who is also a judge on the US show, confirmed Demi's departure on Twitter today.
Simon, 54, told fans that the door has been left open for the popstar to return in the near future.
He told his nine million followers: "To avoid speculation because of her tour next year, it was unlikely she could do that and X Factor.
"She and I have had our ups and downs but now consider her a true friend. The door will always be open. And thank you Demi. Simon x."
The current third series of the US show is drawing to a close, and the winner will be announced on the series finale on Thursday in America. It will be aired on ITV2 in the UK on Saturday.
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Watch Demi performing her song 'Neon Lights' on The X Factor USA below: