I'll try to answer these questions in order based on my limited experience with Microscale:
Yes, they are milky in the bottle but dry clear;
I would recommend distilled water, but as to thinning it might be a trial and error experiment;
Many people glosscoat the entire model, but others only where the decals go. I glosscoat the entire model since I usually use a wash in the panel lines, and the gloss helps the wash flow. I've also tried using Future floor polish as a setting solution for decals, with good results. When I do this, I only use the Future where the decals will go. However, I'll still apply a glosscoat over the entire model (including said decals) for the wash. One reason I do it this way is to cut down on the number of glosscoats on the model so not to fill in those panel lines I will apply the wash to. When I've done it this way, I've not a problem with any noticeable ring. But as I said, I follow up with another glosscoat;
The coats are fairly durable and should hold up to some routine handling, but I'm not sure about polishing.
Now that I've said all this, I don't use Microscale gloss or flat anymore. Personally, I use Future floor polish for my glosscoat and Pollyscale Clear Flat for my matte coat, which is an acrylic.
Hope this helps!
Mark