Smith was born in 1950 into an African-American family in Baltimore, Maryland, the daughter of Anna Rosalind (née Young), an elementary school principal, and Deaver Young Smith, Jr., a coffee merchant. She has four younger siblings. She started attending school shortly after the city had started integrating the public schools, and attended both majority-black and majority-white schools during her lower years. Smith is an alumna of the historic Western High School, an all-girls school.

Smith studied acting at Beaver College (now Arcadia University), where she was one of seven African-American women in her class, graduating in 1971. During her college career, she started to identify as Black. Later she went to the West Coast for graduate work, receiving an M.F.A. in Acting from the American Conservatory Theater in San Francisco, California.

Smith teaches in the Department of Art & Public Policy at the Tisch School of the Arts at New York University. In 1986, she joined the faculty of the University of Southern California School of Dramatic Arts. From 1990 to 2000, she was a professor in the drama department at Stanford University and prior to that taught at Carnegie Mellon University. She also teaches at NYU School of Law.

Smith is best known as a playwright and actress for her “documentary theatre” style, also called verbatim theatre, in plays such as Fires in the Mirror (1992) and Twilight: Los Angeles, 1992 (1993). Both featured Smith as the sole performer of multiple and diverse characters, based on interviews she had conducted with numerous residents and commentators in the two cities where riots took place. For these works, she won the Drama Desk Award for Outstanding One-Person Show two years in a row. She interviewed more than 100 people as part of her creation of Fires in the Mirror, which dealt with the 1991 Crown Heights riot. In 1992, she interviewed some 300 people as part of her research for creating Twilight: Los Angeles, 1992, which dealt with the 1992 Los Angeles riots after the acquittal of police officers who beat Rodney King, in events captured on tape. Both of these plays were constructed using material solely from interviews.

As a dramatist, Smith was nominated for the Pulitzer Prize for Drama in 1993 for Fires in the Mirror, which won her a Drama Desk Award for Outstanding One-Person Show. She was nominated for two Tony Awards in 1994 for Twilight: one for Best Actress and another for Best Play. The play won her a Drama Desk Award for Outstanding Solo Performance and a Theatre World Award.

In 2000 Smith published her first book, Talk to Me: Travels in Media and Politics, through Random House. (It was published in paperback in 2001.) In 2006, she released Letters to a Young Artist: Straight-up Advice on Making a Life in the Arts – For Actors, Performers, Writers, and Artists of Every Kind.

Smith’s plays House Arrest (2000) and Let Me Down Easy (2008) were also created in this style. Let Me Down Easy, which explored the resiliency and vulnerability of the human body, debuted at the Long Wharf Theatre in January 2008. It was also performed at the American Repertory Theater in September and October 2008. A revised version of the show had its New York City premiere Off-Broadway at Second Stage Theatre in October 2009. It enjoyed favorable reviews and an extension into January 2010. It was a featured program as part of PBS’s Great Performances series on January 13, 2012.

Smith debuted her one-woman play, The Arizona Project in Phoenix, Arizona, in November 2008. The piece, which explored “women’s relationships to justice and the law,” was commissioned by Bruce Ferguson, director of Future Arts Research (F.A.R.), a new artist-driven research program at Arizona State University in Phoenix.

In 2009, Smith was an artist-in-residence with the Center for American Progress.

She had recurring roles in the TV series The Practice (2000) and as Dr. Nancy McNally on The West Wing (2000–06). Smith also appeared as hospital administrator Gloria Akalitus in the Showtime dark comedy series Nurse Jackie, which premiered in June 2009. Early in her television career, she appeared on the long-running soap opera All My Children in the recurring role of “Hazel the shampoo girl”.

Smith was one of the 1996 recipients of the MacArthur Fellowship, often referred to as the “genius grant.” She also won a 2006 Fletcher Foundation Fellowship for her contribution to civil rights issues, as well as a 2008 Matrix Award from the New York Women in Communications, Inc. In 2009, she won a Fellow Award in Theater Arts from United States Artists.

The United Solo Theatre Festival board honored her with the award for outstanding solo performer during the inaugural edition in November 2010.

In Spring 2012, Smith was the first artist-in-residence at Grace Cathedral, San Francisco, a program founded by the Very Rev Jane Shaw, Dean of Grace Cathedral, who shared Smith’s vision of “bringing together art and religion”.

In 2013, she received the 2012 National Humanities Medal from President Barack Obama. In 2015 the National Endowment for the Humanities selected her for the Jefferson Lecture, the U.S. federal government’s highest honor for achievement in the humanities, delivering a lecture entitled “On the Road: A Search for American Character”.

In February 2014, Smith appeared as a mentor in Anna Deavere Smith: A YoungArts Masterclass, part of the HBO documentary series Masterclass.

In 2015, Smith appeared as a guest of Dr. Henry Louis Gates, Jr., on the PBS television show Finding Your Roots. Her ancestry in America was revealed to her for the first time. She was descended from a long line of free people of color. The most striking facts were linked to her great, great grandfather, Basil Biggs, born 1820 in Maryland. He and his wife Mary were listed in the 1850 U.S. census to be free. His occupation was listed as veterinarian. In 1858, he moved his wife and four children from the slave state of Maryland to the free state of Pennsylvania. He chose to settle in Gettysburg. Another newsworthy article was found in the Cleveland Gazette (1892) which referred to Basil Biggs as the “wealthiest Afro-American in Gettysburg,” mentioning his great home on 120 acres. 41% of Smith’s European ancestry is from Great Britain, with remote Scandinavian, Finnish, Russian, Italian, and Greek.

In early 2017, Smith worked with Melissa McCarthy in the film Can You Ever Forgive Me? In New York City, they filmed one scene together in which their characters briefly reunite for the first time after the long-ago end of their relationship. Smith’s character is a university professor of literature. In October 2018, this film was distributed to cinemas by Fox Searchlight Pictures.

She was elected to the American Academy of Arts and Sciences in 2019.