Actually WLW sends it in UTC time. This didn’t always work correctly with WordPress due to a bug on the server side, but we pushed out a WLW fix to work around it a few weeks ago.
Windows Live Writer works very well with WordPress.
Hi, I’m a dev on the Writer team.
http://codex.wordpress.org/Windows_Live_Writer_Help
See explanation under “Image uploading fails”. You can confirm this is the problem by resizing your “Link to – source image” to be a smaller size–if posting then succeeds, it’s almost certainly this.
If you need further assistance and can’t find an answer here, please stop by our forum as we’re more likely to see it. Thanks.