Capitalize titles if they precede a name; use lower case if not.
General Grant won the Civil War. The general won the war.
Professor Day gave a good lecture. The professor is intelligent.
We prayed with Rabbi Goldstein. The rabbi prayed with us.
All hail Queen Elizabeth! We saw the queen bow to the king.
However, titles of respect remain capitalized:
the First Lady
One can also make a case for the following:
All hail the Queen!
Here, the crowd is referring to a particular queen, not the position of queen. It can also be argued it is a term of respect from the well-wishers. This case is ambiguous; go with the style you prefer.
Ethnic and religious groups
African Americans (but not black people)
Caucasian (but not white people)
the middle class
Names of places
Capitalize cities, countries, continents, geographic ranges, bodies of water and regions: Chicago, Lithuania, Antarctica, the Swiss Alps, Pacific Ocean (the Pacific), the Midwest, the Rocky Mountains. One also capitalizes popularnames, even though they may not be the proper names:
the Village [Greenwich]
the Promised Land [Israel]
the Windy City [Chicago]
Tornado Alley [a zone in the Midwest]
Organizations and associations
AFL-CIO (but, the union)
the Chicago Bears; the Bears
Democrat; Democratic Party [party members]
anarchists, socialists, republicans [ideological movements as opposed to recognized parties]
Historic events and time periods
World War II; the Second World War
but: the second world war to come about was WWII
the Enlightenment, the Renaissance, the Dark Ages
the Fifth Republic, the Ming Dynasty [debated whether to capitalize "dynasty"]
the War on Crime
Cold War; Cold War era [debated]
the forties [1940s]; but the Roaring Twenties
Exceptions and more
Now that I've given you the rules, it's time to turn it all upside down. There are certain times when it is acceptable to break them.
One of the most classic examples occurs in fantasy novels: Faeries and Dwarves and Orcs, oh my! Yes, faeries can become Faeries when fantasy writers turn faeries into a specific group of people - like Asians or such. Fantasy writers also like turning the tower into the Tower and the forest into the Forest. Sometimes this is okay, sometimes not. One of the most powerful rules of capitalization in fiction writing is to not over capitalize. If you over capitalize anything, it loses it's power and becomes another mundane entity. Use the exceptions sparingly and don't create your world around them. You don't need to creatively break the rules to get attention, lest you get the wrong kind.
Another area we often find it acceptable to break the rules is in business. Sometimes our bosses find themselves on an ego trip and insist on having their title capitalized under every circumstance. Business theorists also love to capitalize their theories, which contravenes the traditional accepted styles. In fact, we often see theories capitalized regularly: Management Theory, Particle Theory, the Theory of Evolution. McGregor's theory of motivation, theory x and theory y, is most often written in business articles in capitalized format: Theory X and Theory Y states that individuals have more powerful motivation triggers than....
There are those who write fiction that believe you can do no wrong when it comes to grammar, punctuation and general rules for writing. I'm here to tell you that is not the truth. If an editor or agent sees a manuscript full of errors, whether purposeful/creative or not, they will dump it before they finish the first page.
One of the most comprehensive books to treat the subject of capitalization in great depth and with a plenitude of examples is The Chicago Manual of Style (15th ed.). In fact, there are 70 pages of detailed explanation for just about every question you might have about capitalization. Most books only treat the subject cursorily.
As always, there is also a wide variety of resources available on the internet. If you want to be a good writer, invest in some of the tools you need to get the basics right.
Darcie Carsner Torres is a professional editor and ghost writer with over twenty years experience in the field. She is a favorite on Elance.com and through her website http://www.penandpestle.com. She also coaches aspiring writers and provides a host of writing resources through http://www.blackinkcafe.com.
For additional resources on sentence syntax and standards, see www.onlineclasses.net.