ifconfig 1.2.3.4 mtu 1492
This will set MTU to 1492 for incoming, outgoing packets or both? I think it is only for incoming
TLDR: Both. It will only transmit packets with a payload length less than or equal to that size. Similarly, it will only accept packets with a payload length within your MTU. If a device sends a larger packet, it should respond with an ICMP unreachable (oversized) message.
The nitty gritty: Tuning the MTU for your device is useful because other hops between you and your destination may encapsulate your packet in another form (for example, a VPN or PPPoE.) This layer around your packet results in a bigger packet being sent along the wire. If this new, larger packet exceeds the maximum size of the layer, then the packet will be split into multiple packets (in a perfect world) or will be dropped entirely (in the real world.)
As a practical example, consider having a computer connected over ethernet to an ADSL modem that speaks PPPoE to an ISP. Ethernet allows for a 1500 byte payload, of which 8 bytes will be used by PPPoE. Now we're down to 1492 bytes that can be delivered in a single packet to your ISP. If you were to send a full-size ethernet payload of 1500 bytes, it would get "fragmented" by your router and split into two packets (one with a 1492 byte payload, the other with an 8 byte payload.)
The problem comes when you want to send more data over this connection - lets say you wanted to send 3000 bytes: your computer would split this up based on your MTU - in this case, two packets of 1500 bytes each, and send them to your ADSL modem which would then split them up so that it can fulfill its MTU. Now your 3000 byte data has been fragmented into four packets: two with a payload of 1492 bytes and two with a payload of 8 bytes. This is obviously inefficient, we really only need three packets to send this data. Had your computer been configured with the correct MTU for the network, it would have sent this as three packets in the first place (two 1492 byte packets and one 16 byte packet.)
To avoid this inefficiency, many IP stacks flip a bit in the IP header called "Don't Fragment." In this case, we would have sent our first 1500 byte packet to the ADSL modem and it would have rejected the packet, replying with an Internet Control (ICMP) message informing us that our packet is too large. We then would have retried the transmission with a smaller packet. This is called Path MTU discovery. Similarly, a layer below, at the TCP layer, another factor in avoiding fragmentation is the MSS (Maximum Segment Size) option where both hosts reply with the maximum size packet they can transfer without fragmenting. This is typically computed from the MTU.
The problem here arises when misconfigured firewalls drop all ICMP traffic. When you connect to (say) a web server, you build a TCP session and send that you're willing to accept TCP packets based on your 1500 byte MTU (since you're connected over ethernet to your router.) If the foreign web server wanted to send you a lot of data, they would split this into chunks that (when combined with the TCP and IP headers) came out to 1500 byte payloads and send them to you. Your ISP would receive one of these and then try to wrap it into a PPPoE packet to send to your ADSL modem, but it would be too large to send. So it would reply with an ICMP unreachable, which would (in a perfect world) cause the remote computer to downsize its MSS for the connection and retransmit. If there was a broken firewall in the way, however, this ICMP message would never be reached by the foreign web server and this packet would never make it to you.
Ultimately setting your MTU on your ethernet device is desirable to send the right size frames to your ADSL modem (to avoid it asking you to retransmit with a smaller frame), but it's critical to influence the MSS size you send to remote hosts when building TCP connections.