Protein palmitoylation, a classical and common lipid modification, regulates diverse aspects of neuronal protein trafficking and function. The reversible nature of palmitoylation provides a potential general mechanism for protein shuttling between intracellular compartments. The recent discovery of palmitoylating enzymes — a large DHHC (Asp-His-His-Cys) protein family — and the development of new proteomic and imaging methods have accelerated palmitoylation analysis. It is becoming clear that individual DHHC enzymes generate and maintain the specialized compartmentalization of substrates in polarized neurons. Here, we discuss the regulatory mechanisms for dynamic protein palmitoylation and the emerging roles of protein palmitoylation in various aspects of pathophysiology, including neuronal development and synaptic plasticity.