Reviewing an AC dimmer - trying to understand
I)


It doesn't. Whether it's low or high, the resistors act as a pull-up while also providing the needed signal. The current, for a supposed logic low would be \$115\sqrt{2}/940k\Omega = 173 \mu A\$
As Some Hardware Guy said, it's floating so the reference is 0V because its supply is mono-alternance and done through a capacitive impedance (reactance) of \$1\mu F\ = 2.65k\Omega \$ (60Hz) or\$  3.18k\Omega\$ (50Hz).
They're there for not actually putting the pin to 160V, your fear at #1.


II)


C1 has the mentioned reactance, acting as an "active" resistor, limiting current through Z1. 

I couldn't find the 0.5W you're talking about.



The rest:


The LED will still have ~2V foreard voltage drop and the maximum current will  be: \$ I_{max}=\frac{115\sqrt{2}-2}{100k\Omega} = 1.62mA\$
There won't be -120V since its reference will be the IC's supply, therefore the bridge will clamp the voltage.


You're welcome, but you should really try those simple circuits that have proven to be good enough, instead of choosing this.