Charlie Babbitt (Tom Cruise), a Los Angeles car dealer in his mid-twenties, is in the middle of importing four grey market Lamborghinis. The deal is being threatened by the EPA, and if Charlie cannot meet its requirements for pollution control, he will lose a significant amount of money. After some quick subterfuge with an employee, Charlie leaves for a weekend trip to Palm Springs with his girlfriend, Susanna (Valeria Golino).
Charlie's trip is cancelled by news that his estranged father, Sanford Babbitt, has died. Charlie travels to his hometown in Cincinnati, Ohio, to settle the estate, where he learns an undisclosed trustee is inheriting $3 million on behalf of an unnamed beneficiary, while all he is to receive is a classic Buick Roadmaster convertible and several prized rose bushes -- all of which are dying from neglect. Eventually he learns the money is being directed to Wallbrook, a mental institution which is the home of his autistic older brother, Raymond (Dustin Hoffman), of whose existence Charlie was previously unaware. We learn that Charlie grew up a rebellious child and that following the death of his mother, he ran away from home at age 16 to California where he lived ever since, never speaking to his father ever again. Prior to his flight to California, Charlie had taken the Roadmaster out on his 16th birthday without his father's permission. His father subsequently called the police, reported the car stolen, and Charlie and his friends were picked up by the police. Charlie's father allowed the police to hold his son in jail for two days (the friends he was driving with had been bailed out by their own parents within hours). This leads Charlie to ask the question that permeates the movie: "Why didn't somebody tell me I had a brother?"
Although Raymond has autism, he is high-functioning and also has superb memory recall, but little understanding of subject matter thus making him an "overgrown child". He is frightened by change and adheres to strict routines (for example, his continual repetition of the "Who's on First?" sketch whenever he becomes nervous or agitated) and has regimented mealtimes and outings. Except when he is in distress, he shows little emotional expression and avoids eye contact. Numbed by learning that he has a brother and determined to get what he believes is his fair share of the Babbitt estate, Charlie takes Raymond on what becomes a cross-country car trip (due to Raymond's fear of flying) back to Los Angeles to meet with his attorneys. Charlie intends to start a custody battle in order to get Raymond's doctor, Dr. Bruner (Jerry Molen), to settle out of court for half of Sanford Babbitt's estate so that the mental institution can maintain custody of Raymond.
During the course of the long journey, Charlie learns about Raymond's autism, which he initially believes is curable resulting in his frequent frustration with his brother's antics. He also learns about how his brother came to be separated from his family, as a result of an accident when he was left alone with Raymond when Charlie was a baby, about 20 months old and Raymond was age 10. Raymond also sings "I Saw Her Standing There" by The Beatles like he did when Charlie was three or four years old. Charlie remembers the incident as early as he could remember and always thought that the person singing to him, (whom the young Charlie referred to as the 'Rain Man' due to Raymond's slow-speaking of his own name) was an imaginary character. While Charlie and his brother reminisce about their relationship, Charlie turns on the hot water in the hotel room bathtub -- Raymond suddenly has an episode where he hits himself and screams, yelling that the hot water will burn Charlie if he touches it. Charlie realizes that Raymond had tried to give his younger brother a bath and had scalded him, prompting their parents to send Raymond to Wallbrook.
Charlie proves to be sometimes shallow and exploitative, as when he uses Raymond's precision memory and takes him to Las Vegas to win money at blackjack by counting cards. Casino security begins to watch Charlie and Raymond, though they can't find any proof that either is using a cheater's system to win against the house so Charlie can pay off his considerable debts back in LA. Security sends an attractive woman who finds Raymond alone in the casino's bar. She is able to get Raymond to allude to his and Charlie's counting of cards. Later, in their hotel suite, Raymond mentions the "date" he'd made with the woman. Charlie suggests that Raymond will have to dance with her and he shows Raymond how to properly dance with a woman. The two share a brotherly and friendly moment until Charlie tries to hug Raymond, who shrieks in fright.
Shortly after, security asks to speak to Charlie privately and suggests that Charlie take his winnings, about $80,000 and leave. Charlie agrees. Susanna meets Charlie and Raymond at the hotel and she & Charlie reconcile -- they'd had a falling out just as the journey from Cincinnati had begun over Charlie's cold treatment of his brother. While she escorts Raymond back up to the suite, she kisses Raymond.
In the end, Charlie finds himself becoming protective of Raymond, and grows to truly love him.
Upon arriving in Los Angeles, Charlie finally meets with his attorney Boros (Adam S. Gottbetter
) to try to get his share of his inheritance, but then decides that he no longer cares about the money and really just wants to have custody of his brother. However, at a meeting with a court-appointed psychiatrist and Dr. Bruner, Raymond is unable to decide exactly what he wants (to live with Charlie in California or stay at the mental hospital in Ohio). Eventually, the psychiatrist presses Raymond to make the decision, upsetting him and leading Charlie to request that the doctor back off. Raymond is allowed to go back home to Cincinnati. Charlie, who has gained a new brother and mellowed considerably, promises Raymond as he boards an Amtrak train that he'll visit in two weeks.