How can I choose between iPhone storage and iCloud?

iCloud and local storage are 2 separate things.

If you max out the 256GB of lCloud local storage, you will not be able to store anything else on the iPhone. and it will cause issues with the iPhone's operation once it no longer has any storage whatsoever. It will not automatically offload stuff to iCloud at all.

iCloud does not change this. iCloud just allows you to sync certain things like some files, photos, videos to the cloud, but they still take up space on the iPhone. Photos and videos can be optimized so the full resolution versions reside on iCloud and the iPhone keeps smaller, lower quality versions locally that use less space. iCloud is also used to store backups.

If the local storage get's very low, the iPhone will offload apps onto the app store to make room. Apps cannot be stored in iCloud.

If you think you may go over the 256GB, then go for 512GB. It's not a good time when you don't have space.

It's better to transfer large videos, and files to a computer than to keep them on the iPhone.

at109 wrote:

I'm looking at buying a new iPhone, you have to pick how much storage you want on your phone ie. 256gb or 512gb.

My phone currently has 126gb of 256gb used. I also share 2TB of iCloud storage.

My question is, if on this new phone I go over 256GB of storage, but I have 2TB of iCloud storage, what does this mean for me? Do I need to get the phone with 512GB? Or does that just mean stuff will get offloaded into the cloud?

iCloud is for syncing things, not freeing up space on your iPhone.

What's the difference between device storage and iCloud storage? - Apple Support

There are some tweaks you can make with Optimized photo storage that will help but don't get into the habit of thinking that iCloud will make up for iPhone storage.

If you've only used 126 GB on your old phone, unless you expect your needs to change significantly (or you have the spare cash lying around), 256 GB will probably continue to be fine.

My last two phones, an iPhone 11 Pro, 15 Pro were both 256GB and like you, I used about 130GB.

Some things can’t always be offloaded to the cloud such as apps. Also I’ve found it very hard to delete videos and photos from a device and not delete it from iCloud at the same time so you might end up having copies on the cloud and on your iPhone. I would say 512 gb if you intend to keep your phone and not run out of storage for multiple generations.