Alan Ball began developing American Beauty as a stage play in the early 1990s, partly inspired by the media frenzy surrounding the 1992 Amy Fisher trial, but abandoned the play format when he realized the story worked better as a film.

Ball was inspired by watching a plastic bag blow in the wind outside the World Trade Center for about ten minutes in the early 1990s, an experience that provoked an unexpected emotional response and later became Ricky's key monologue in the film.

DreamWorks bought the spec script outright for $250,000 in April 1998, outbidding Fox Searchlight, October Films, The Samuel Goldwyn Company, and Lakeshore Entertainment, and initially planned to make the film for only $6–8 million.

Before Kevin Spacey and Annette Bening were cast, DreamWorks suggested alternatives including Bruce Willis, Kevin Costner, John Travolta, and Chevy Chase (who turned it down) for Lester, and Helen Hunt or Holly Hunter for Carolyn.

Kirsten Dunst and Sarah Michelle Gellar both turned down the role of Angela Hayes, Dunst due to discomfort with the character's sexual content (choosing The Virgin Suicides instead) and Gellar due to scheduling conflicts with Buffy the Vampire Slayer.

Sam Mendes offered Annette Bening the role of Carolyn without DreamWorks' consent, upsetting studio executives, though the studio later entered negotiations with both her and Spacey.

Because Thora Birch was 16 years old at the time of filming, child labor representatives had to be present on set alongside her parents, who gave approval, during the shooting of her brief nude scene.

To help Wes Bentley prepare for the role of Ricky, Mendes gave him a video camera and told him to film the world the way his character would.

Kevin Spacey based Lester's early slouching, disheveled demeanor loosely on Walter Matthau, and he and Mendes studied Jack Lemmon's performance in The Apartment (1960) to help shape the character.

Mendes lent Annette Bening a Bobby Darin recording of "Don't Rain on My Parade" to help her get into Carolyn's mindset, and Bening liked it so much she convinced the director to use it in the scene where Carolyn sings in her car.

Lester's posthumous voiceover narration is a deliberate homage to Sunset Boulevard (1950), another film narrated in retrospect by a character who is already dead.

In earlier drafts, the script included framing bookend scenes in which Ricky and Jane were prosecuted for Lester's murder after being framed by Colonel Fitts, but these were cut in post-production.

Studio president Walter Parkes convinced Alan Ball to rewrite the ending so that Lester and Angela do not have sex, arguing that in Greek mythology the hero has a moment of epiphany before tragedy occurs.