There are two fuel filters, a screen in the tank and a canister type in the engine compartment. See link below for photo:
http://info.rockauto.com/BeckArnley/...ml?0431048.jpg
Follow the fuel line back from the engine to the filter. The banjo fitting on the bottom of the filter can be VERY hard to break free and can lead to rounding over the corners of the nut. Suggest using a flare wrench designed to remove tube fittings. Use two new washer crush gaskets or it may leak after installation.
The rag is used to catch the fuel coming of the fitting once loosened.
As to when to change, assume most owners never change it. However a few have reported better performance on higher mileage car and it may lower the work load on the fuel pump. The filter is cheap enough thus the only issue would be trouble/damage with removing the lower banjo nut.
The Camry with V6 option has the same engine (as do other Toyota models). As such viewing the more popular Camry forum can provide a good source of info.