I been doing a lot of reading, and i'm afraid that i don't totally understand how the transaction fee thing works.
That much is clear. Lets see if we can help you understand better. To start with, please immediately forget everything you think you know about bitcoin transaction fees. For that matter, please forget everything you think you know about mining. At the moment your understanding is significantly incorrect.
From what i gather, the miner of the block gets a small pitance when his block is used?
The miner chooses unconfirmed transactions. He then packages them up and calculates a special hash called a "merkle root". He builds a block header that includes the merkle root of the chosen transactions. If he successfully mines the block he broadcasts it, and all those chosen transactions become "confirmed". In exchange for doing this work, the miner receives a block subsidy of newly created bitcoins (25 BTC) and the transaction fees from all the transactions that the miner selected for his block. The people who are sending the transactions voluntarily decide for themselves if they want to include a fee with their transaction. When the miner chooses the transactions he will include in his block, he can use any criteria he likes. The value of the voluntary fees is a way for the transaction sender to provide a financial incentive to the miner to encourage him to pick their transaction.
1. Where does the miner set the amount?
At the moment, unless the miner has created their own mining software, I believe the selection process is built into the software. I'm not sure of the exact process in the software, but it likely sorts transactions by value of the fee, and chooses the transactions with the highest value.
2. Can the miner change the amount?
The miner can change the threshold he is willing to accept, but it would require some computer programming skills. I'm not yet aware of any commonly used mining software that allows you to easily configure which transactions you'll accept. If I'm mistaken about this, hopefully someone with more knowledge about mining software will stop in and correct me.
3. Do you know what the fee will be prior to making the transaction?
Yes. Fees are voluntary. You can set the fee to be whatever you want it to be when you send a transaction. Some wallets enforce a minimal fee on transactions that seem spammy. In particular there is a fee of 0.0005 BTC per kilobyte that is enforced by many wallets if the transaction is more than 10 kilobytes or any output is less than 0.01 BTC.
4. Can you choose a different block with no fee or a lower fee?
You don't choose the block, you choose the fee. Then you wait for confirmations. Decreasing the fee reduces the incentive for miners to include your transaction in the blocks they are creating, increasing the fee increases the incentive. If you don't include a fee, or include a fee that is too small, you may end up waiting a very long time for a miner to get around to including your transaction in a block they create. If you want/need a faster confirmation, you can include a larger fee when you create the transaction.
5. Does the fee come out of the amount being transferred or is it added to the amount being transferred and taken from the sender?
The fee is voluntarily added by the sender in addition the the amount being sent.
