This seems like it should be a simple straightforward issue, but I still have problems with ocassionally getting clipped audio (or some kind of distortion, I'm no audio expert) on Windows 7 with Realtek's "HD Audio" chipset/driver.
As far as I can tell, I rarely if ever have this problem with the same hardware in Linux with PulseAudio (though I can intentionally cause it using alsamixer by pushing "Master" to 100%) and didn't have this problem in the past on Windows with Creative Labs soundblaster cards.
PulseAudio does nice things: it looks at the requested volume level for each input and output, and arranges the actual controls on each intermediate stage to keep the values as high as possible without clipping, while also making use of knowledge of each mixer's stepping values to give you finer control than your hardware would give you by default :). It does rely on your sound hardware correctly reporting its actual amplification characteristics, but it seems that most hardware is pretty good nowadays, or at least consistent enough to get worked around.
As far as I can tell, I rarely if ever have this problem with the same hardware in Linux with PulseAudio (though I can intentionally cause it using alsamixer by pushing "Master" to 100%) and didn't have this problem in the past on Windows with Creative Labs soundblaster cards.