Since you're acomplete n00b, why not take the thing to your coop and sign up for a class on refurbing an old bike? If they don't have a class, have their mechanic do it all and ask him to explain the process while you watch.
1. What tools will I need to remove the cranks and to overhaul the BB and headset?
For the BB, you'll need a crank puller and a bottom bracket wrench. These can be found at your coop, LBS or online.
2. Whats a good tool for snipping the break cables? I started doing it with a pair of diagonal pliers and it was a pain.
A cable cutter does make the job a lot easier. The one I have is a Park brand; cost about $30. These can be found at your coop, LBS or online.
3. I can't decide what route to go for cleaning and polishing materials. I've looked through many threads here on the topic and they are always conflicted.
Not 'conflicted' so much as everyone has their favorites and just about anything will work just fine. Any cleaners, rubbing compounds and waxes you'd use to clean, polish and wax your car will work great.
4. I cannot seem to get the rear derailer off with a simple allen wrench. It just turns and turns (and is very difficult to turn). Thoughts?
Does it have a backing nut on the other end of that allen screw, that is, on the inside of the dropout? If so, you'll need to hold that nut stationary while you back the screw out. As with most metal parts on an old bike, it'd be best to soak it with a shot of WD-40, PB Blaster or Kroil to loosen any rust on the nut.
5. What should I be wary of as I continue to take the bike apart? I've started putting grouped pieces in labeled baggies and taking pictures as I go.
Sound like a good plan. Your bike will have reverse threading on the drive side BB cup. (You don't have to even take that one off, if you don't want to. You can clean and re-grease the BB just by removing the non drive side adjustable cup and accessing everything from there.)