Allen left the Swans for Liverpool in 2012 but his time at Anfield has been hampered by injuries.
The 24-year-old played in his side's 1-0 win at Swansea and Taylor said: "I've always known he was a great player, we know in Wales what a good player he is.
"He just needed to be fit. He's a key player and he's in great form."
Taylor added: "He's had problems with injuries which he couldn't have helped, like when he got smashed in Andorra.
Allen has just over two years left on his current Liverpool deal but revealed he has opened talks with the club.
He has been in impressive form for Brendan Rodgers' Liverpool side of late and Taylor says Allen goes about his role in a quiet and effective manner.
"Unless you are a real football person and know the game and see the game like we do, because we're in it, then you may not see the nuts and bolts that Joe does so well," left-back Taylor added.
"It's massive. Look at Leon [Britton] down here over the years, he doesn't spray the passes like [Steven] Gerrard but the nuts and bolts to make your team tick, that's what Joe does.
"That's why Brendan took him there for a lot of money."
Allen and Taylor are set to be included in Wales' squad for the Euro 2016 qualifier against Israel in Haifa on 28 March.
Wales manager Chris Coleman will announce the squad on Wednesday with his unbeaten Wales side facing the Group B leaders.
"We all want to be in the team and we all want to qualify," Taylor added.
"These next few games are massive towards that. They're all big but now we feel we've really got a chance and we don't want to let that go."

The event - Scotland's Thatched Buildings: Developing a plan for the future - will follow up on a survey of Scotland's thatched buildings last year.
Scotland has about 305 thatched roof buildings.
May's event will be held close to the historic Leanach Cottage.
Other thatched roof properties in Scotland include Balevullin Cottage on Tiree and several in Swanston Village, on the outskirts of Edinburgh.
Historic Environment Scotland has organised the event in collaboration with the Society for the Protection of Ancient Buildings (Scotland), the National Trust for Scotland and the Scottish Vernacular Buildings Working Group.
Owners and managers of thatched roof properties and craftspeople have been invited to attend.
Last year, the roof of a traditional blackhouse on the Isle of Lewis was given a new thatch.
The property at Arnol was built in the 1880s on a site that had been occupied by people for more than 2,000 years.
Blackhouses were built in the area by generations of crofting families until 1900. The home that survives today was still inhabited up to 1966.
Midfielder Joe Allen is showing the form that earned him a move to Liverpool, says former Swansea City team-mate Neil Taylor.
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Experts on traditional thatched roofs are to gather for a one-day conference at Culloden Battlefield visitor centre later this year.