How to know if problem is thermostat, temp gauge or sensor or something else?

If the car sits overnight with the motor off, it certainly can not be overheating. I would think the sending unit shorted out. As a test, unplug the coolant temperature sending unit and see if the gauge goes down when the engine is running. It should go down on most cars. Then replace the sender.

Okay, thanks. I'll give that a try.

There can also be a problem with the electrical motor that moves the needle of the guage. I was lucky and it was on the fuel needle. Unfortunately, the fix involves removing the dash display, unsolering old motor and soldering in new one.