Cole's Department Store's special events director Dorey Walker (Elizabeth Perkins) fires Tony Falacchi (Jack McGee) from being the Cole's Department Store's Santa Claus after he gets drunk before taking part in the Thanksgiving parade. Immediately trying to find a replacement, she spots an elderly man (Richard Attenborough) who was berating the inebriated Santa before the parade. When Dorey begs him to take over, he introduces himself as Kris Kringle. Kris does so well during the parade that he is immediately hired to be Cole's main Santa for the holiday period.
All the children in New York begin to believe that he is the real Santa, with the exception of Dorey's six-year-old daughter Susan (Mara Wilson). Dorey's boyfriend, attorney Bryan Bedford (Dylan McDermott), does his best to convince Susan to believe. While being babysat one night by Kris, Susan shares with him her Christmas wish, she would like a dad, a house (used every year for the Cole's catalogue photoshoot) and a baby brother. Kris asks if she would begin to believe in Santa if she got all those things. Susan agrees that she would.
Kris is credited with bringing in increasingly more sales to Cole's than previous years. One night, he is arrested for assaulting a man on the street, later revealed to be the original drunk Santa, Tony Falacchi. Falacchi had taken revenge by means of setting up Kris to be arrested, with the help of members of staff from a rival department store of Cole's, Shopper's Express. With the help of Bryan, Dorey takes Kris's case to court, and drums up support for him from the public. It soon becomes clear that to get Kris acquitted and freed, Bryan must somehow prove that not only does Santa exist, but that Kris is the real one. It is a seemingly impossible task until Bryan comes up with a plan that requires some help from Susan.
Just as the judge (Robert Prosky) is about to make his decision – and it seems he was going to rule against Kris – Susan walks up to the judge with a Christmas card containing a $1 bill. On the back, the words In God We Trust are circled. The judge realizes that, since the US Department of Treasury can put its official faith in God on US currency with no hard evidence, then the people of New York can believe in Santa Claus in the same way. Left with no choice, the elated judge dismisses the case and declares that Santa is real, existing in the person of Kris Kringle.
Following the court case, Dorey and Bryan are maneuvered by Kris into realizing their true feelings for each other, and are married in a very small ceremony right after the Christmas Eve Midnight Mass. On Christmas morning, Susan wakes to the news of the marriage (via the bright reflections of Dorey's engagement ring on the Christmas tree) and is elated to see that she has part one of her Christmas wish, Bryan as her new step-dad. Together, Susan, Dorey and Bryan drive out to the catalogue house and upon arrival, find that Kris has arranged for them to purchase the house, which they can now afford due to the size of the Christmas bonus Dorey has received as a result of Kris's work at Cole's.
Susan, now having got two out of three of her wishes, excitedly runs upstairs in the house to look at her bedroom. Dorey and Bryan are about to kiss when Dorey ask her what the last part of her Christmas wish was, and she triumphantly announces that it was a baby brother. Dorey and Bryan both look at each other, shocked, before glancing down at Dorey's stomach and sharing a kiss. The film ends with the belief that Susan has now received all she asked for in her wish.