Mike Pence made the revelation in a statement to the Israeli parliament.
The statement follows Donald Trump’s recognition of Jerusalem as Israel’s capital last month.
The US President’s announcement was condemned by 128 countries in a United Nations General Assembly vote in December, with nine countries supporting the decision and 35 abstaining, amid threats from the US to pull funding from the world body.
The move has been strongly criticised by the Palestinians, who say the status of the city should be decided in future peace negotiations.
Mr Pence said: “In the weeks ahead, our administration will advance its plan to open the US Embassy in Jerusalem – and the United States Embassy will open before the end of next year.
“Jerusalem is Israel’s capital – and, as such, President Trump has directed the State Department to begin initial preparations to move our embassy from Tel Aviv to Jerusalem.”
Arab lawmakers got to their feet during Mr Pence’s speech in the Israeli parliament and held up signs reading: “Jerusalem is the capital of Palestine”.
The issue of the status of Jerusalem and the location of the US Embassy strikes the heart of the Israel-Palestinian conflict.
The Tunisian Labour union, UGTT, has labelled Mr Trump’s decision a “declaration of war”.
Qatar’s foreign minister described the decision as a “dangerous escalation and a death sentence for all who seek peace”.
Israel believes Jerusalem is its “eternal and undivided” capital and the Palestinians claim East Jerusalem as the capital of a future state.
In recognising Jerusalem as Israel’s capital, Mr Trump has endorsed the Israeli position.
In his speech to the Parliament, Mr Pence said: “We stand with Israel because we believe in right over wrong, in good over evil, and in liberty over tyranny”.
Israel’s culture minister, Miri Regev, called Mr Pence “a very welcome guest here” and thanked him and Mr Trump for endorsing the Israeli claims to Jerusalem.
The previous night as Mr Pence landed in Israel, Palestinians in the West Bank set fire to posters of the vice president with the words “Pence, Go Home”.
Mr Pence claimed President Trump’s approach would provide new momentum to peace talks given time.
In his speech, Mr Pence called for the Palestinian leadership “to return to the table”.