I'm curious, how toxic is this method of painting? From everything I've read, this is probably the least toxic way to paint but that still doesn't really tell me how toxic Tamiya acrylic paints are.
Couldn't really tell you. I suppose if you're really concerned you could contact the manufacturer and ask for MSDS sheets. That would be the authoritative source of relevant information...
I believe Tamiya acrylics give off alcohol fumes. I don't know if they give off anything else.
Ventilation is always a good idea - and when it comes to particulate matter (i.e. dust from sanding parts, and so on) you never want to breathe that in. Wet-sanding can help minimize the amount of dust you're exposed to (as the particles get mostly trapped in the water) - and hand-painting instead of spraying would mean that, while you're exposed to some level of fumes, you're at least not exposed to overspray mist...
I don't know the dangers of decal solvent or setting solution, either... these aren't always necessary, however.
As for panel-lining - you've got options. My preferred option is usually to gloss-coat the part and then use a wash. Both gloss-coat and wash could be acrylic...