George Bailey has spent his entire life giving of himself to the people of Bedford Falls. He has always longed to travel but never had the opportunity in order to prevent rich skinflint Mr. Potter from taking over the entire town. All that prevents him from doing so is George's modest building and loan company, which was founded by his generous father. But on Christmas Eve, George's Uncle Billy loses the business's $8,000 while intending to deposit it in the bank. Potter finds the misplaced money and hides it from Billy. When the bank examiner discovers the shortage later that night, George realizes that he will be held responsible and sent to jail and the company will collapse, finally allowing Potter to take over the town. Thinking of his wife, their young children, and others he loves will be better off with him dead, he contemplates suicide. But the prayers of his loved ones result in a gentle angel named Clarence coming to earth to help George, with the promise of earning his wings. He shows George what things would have been like if he had never been born.

In 1900, Lucy Muir (Gene Tierney), widowed for one year, decides to move out of her controlling in-law's house in London to the English seaside with her adolescent daughter Anna (Natalie Wood) and their long devoted maid Martha (Edna Best). Despite the rental agent trying to dissuade her, Lucy decides to rent Gull Cottage at Whitecliff-by-the-Sea. She learns firsthand before she makes the decision the rental agent's hesitance is because the cottage is haunted, supposedly by its now deceased former owner, seaman Captain Daniel Gregg (Sir Rex Harrison). After she moves in, she does meet the spirit of Captain Gregg face-to-face. Because she refuses to be scared away by his presence, the two come to an understanding, including that he will not make his presence known to Anna. As time progresses, the two develop a friendship and a bond. Despite his statements to her that she needs to live her life including finding another husband, Daniel seems not to approve of any of the men that enter her life, including the most serious, children's author Miles Fairley (George Sanders). Because of his feelings for her, Daniel eventually has to decide if being a part of her life is more a benefit or hindrance to her in carrying on with the living, regardless of perhaps not being able to carry out his initial goal of realizing his vision for Gull Cottage if he leaves.

Eben Adams is a talented but struggling artist in Depression era New York who has never been able to find inspiration for a painting. One day, after he finally finds someone to buy a painting from him, a pretty but odd young girl named Jennie Appleton appears and strikes up an unusual friendship with Eben.

Magical