Tyrosine kinase 2 (TYK2) belongs to the Janus kinase (JAK) family of tyrosine kinases, which transmit signals from activated cytokine receptors. GWAS have consistently implicated TYK2 in psoriasis susceptibility. We performed an in-depth association analysis of TYK2 using GWAS and resequencing data. Strong genetic association of three nonsynonymous variants in the exonic regions of the TYK2 gene (rs34536443, rs12720356, and rs2304256) were found. rs12720356 encoding I684S is predicted to be deleterious based on its location in the pseudokinase domain. We analyzed PBMCs from 29 individuals representing the haplotypes containing each of the significantly associated signals. STAT4 phosphorylation was evaluated by phospho-flow cytometry after CD3/CD28 activation of cells followed by IL-12 stimulation. Individuals carrying the protective I684S variant manifested significantly reduced p-STAT4 levels in CD4 + CD25 + CD45RO+ (mean Stimulation Index (S.I.) 48.08, n = 10) and CD8 + CD25 + CD45RO + cells (S.I. 55.71, n = 10), compared to controls homozygous for the ancestral haplotype (S.I. 68.19, n = 10 (p = 0.002) and 76.76 n = 10 (p = 0.0008) respectively). Reduced p-STAT4 levels were also observed in skin-homing, cutaneous lymphocyte associated antigen (CLA)-positive CD4 and CD8 cells from I684S carriers. No significant changes in p-STAT4 for the psoriasis-associated variant rs34536443 was found. These data establish the functional significance of the TYK2 I684S variant in psoriasis susceptibility.