Ted Kramer (Dustin Hoffman) is a workaholic advertising executive who has just been assigned a new and very important account. Ted arrives home and shares the good news with his wife Joanna (Meryl Streep) only to find that she is leaving him. She leaves Ted to raise their son Billy (Justin Henry) by himself. Ted and Billy initially resent one another as Ted no longer has time to carry his increased workload, and Billy misses his mother’s love and attention. After months of unrest, Ted and Billy learn to cope and gradually bond as father and son.
Ted befriends his neighbor Margaret (Jane Alexander), who had initially counseled Joanna to leave Ted if she was that unhappy. Margaret is a fellow single parent, and she and Ted become kindred spirits. One day, as the two sit in the park watching their children play, Billy falls off the jungle gym, severely cutting his face. Ted sprints several blocks through oncoming traffic carrying Billy to the hospital, where he comforts his son during treatment.
Fifteen months after she walked out, Joanna returns to New York to claim Billy, and a custody battle ensues. During the custody hearing, both Ted and Joanna are unprepared for the brutal character assassinations that their lawyers unleash on the other. Margaret is forced to testify that she had advised an unhappy Joanna to leave Ted, though she also attempts to tell Joanna on the stand that her husband has profoundly changed. Eventually, the damaging facts that Ted was fired because of his conflicting parental responsibilities which forced him to take a lower-paying job come out in court, as do the details of Billy’s accident. His original salary was noted as “$33,000 a year”, whereas he was forced to admit that his new salary was only “$28,200”, after Joanna has told the court that her “present salary” as a sportswear designer is “$31,000 a year”.
The court awards custody to Joanna, a decision mostly based on the tender years doctrine. Devastated with the decision, Ted discusses appealing the case, but his lawyer warns that Billy himself would have to take the stand in the resulting trial. Ted cannot bear the thought of submitting his child to such an ordeal, and decides not to contest custody.
On the morning that Billy is to move in with Joanna, Ted and Billy make breakfast together, mirroring the meal that Ted tried to cook the first morning after Joanna left. They share a tender hug, knowing that this is their last daily breakfast together. Joanna calls on the intercom, asking Ted to come down to the lobby alone. When he arrives she tells Ted how much she loves and wants Billy, but she knows that his true home is with Ted, and therefore will not take custody of him. She asks Ted if she can go up and see Billy, and Ted says that would be fine. As they are about to enter the elevator together, Ted tells Joanna that he will stay downstairs to allow Joanna to see Billy in private. After she enters the elevator, Joanna wipes tears from her face and asks her former husband “How do I look?” As the elevator doors start to close on Joanna, Ted answers, “Terrific.”