Formatting a Character's Thoughts

Treat a character's thoughts just dialogue, but without the quotes. Use italics in place of the quotes. In the case below, note that the character's thoughts are capitalized even though they don't seem to be the beginning of the sentence (the same is done when a dialogue attribution comes before the actual dialogue). Also note that "she" is not italicized, because italics are also used for emphasis, to make a word stand out, and in order to achieve the same effect in a character's thoughts, the writer removes the italics from the emphasized word.

She thought, What's she doing here? (Hambly 131) 

NOT

She thought, what's she doing here?

Source

Hambly, Barbara. Star Wars: Children of the Jedi. NY, NY:
    Bantam Doubleday Dell Publishing, 1996. Print.

When do you capitalize mom, dad, mother, and father?

Generally, if you can replace the words mom, dad, mother, and father with the person's name in the sentence, you should capitalize them.

For example:

"What did you say, Mom?"

He wasn't going to tell Mom.

"Of course, Dad."

"It's behind the bed--Dad's bed."

By contrast:

My mother lied.

My father was drunk.

His mom wasn't going to give him another cookie, no matter how much he begged.

Note: the same rule applies for titles (Doc, Sergeant, etc.), and other familial relations (Grandma, Grandpa, etc.).

Capitalization

Capitalization and Quotations:

1. If you're quoting a complete sentence, capitalize the first letter.

He said, "She wasn't a very remarkable individual."

2. If a complete sentence is split with a dialogue attribution in the middle, don't capitalize the second part of the sentence.

"Give me that magazine," he said, "and pass me those books while you're at it."

Capitalization and Titles:

1. Titles used with people's names should be capitalized.

My brother referred me to Doctor Stevens.

The longest running politician I know is Mayor Edwards.

2. Titles used in place of a person's name to directly address that person should be capitalized.

How about it, Sergeant?

What's the diagnosis, Doctor?

But

I'd like that, miss.

How about it, sir?

Some common titles:

Religious titles: Bishop, Father, Rabbi, Reverend, Sister, Monsigneur
Military titles: Admiral, Major, Lieutenant, Colonel, Sergeant, General
Elected officials: Mayor, President, Congressman, Secretary, Senator, Congresswoman, Ambassador
Earned titles: Doctor, Provost, Professor, Dean
Honorary titles: Sir, Lady, Lord, Madame

Other Capitalization

1. Do not capitalize seasons

2. Capitalize the first word of salutations and closings of letters

Dear Madam:

Yours truly

3. Capitalize proper nouns and words derived from them

My favorite subject is English.

But no capitals are used in this sentence:

My favorite subject is math.

4. Capitalize specific school courses

I need to take Communications 202 and Literature 301 to finish this academic year. I'd also like to take history, but it wouldn't contribute to my major.

5. After a colon, do not capitalize the following sentence—unless there's more than one, e.g. a block quote—and do not capitalize a list that follows a colon.

I packed four types of sandwiches in the picnic basket: ham, cheese, bologna, and tuna.

As far as he was concerned there were only two way to settle the argument: they could fight it out now, or they could agree to fight it out later.

Sources

http://www.grammarbook.com/punctuation/capital.asp

Rozakis, Laurie. English Grammar for the Utterly Confused. McGraw-Hill Companies, Inc., 2003.