My own budget has enough to upgrade her gift either to 2TB fusion or 1 TB SSD (and maybe 16 GB memory).
If you can comfortably afford the 1TB SSD, I'd say that is a no-brainer.
As for RAM - the great thing about the 27" iMac is that you can upgrade the RAM if and when you need it - certainly don't pay Apple for the upgrade to 16GB when you can get an
extra 16GB of 3rd party RAM (giving 24GB total) for less.
Right now I created a virtual disk and installed Mojave on it so that I can run kJams Karaoke, which won't be 64 bit until middle of next year. My partition is so small it won't update to the current version of Mojave, and my Mac is running slowly.
So, if I understand correctly, you are running Catalina, and have used VMWare Fusion to create a VM to run Mojave for some 32-bit only software. With 8GB RAM. On an iMac with only a 128GB SSD component to its fusion drive...
A modest proposal:
don't do that! Just revert your main Mac back to Mojave (...and either get the new Mac quick before they start shipping with Catalina or keep your old Mac as a Karaoke machine).
Public service announcement: despite Apple's irresponsible pushing of Catalina via Software Update
don't install major MacOS version updates the moment they come out unless you
enjoy fixing problems and/or have a spare Mac to try them on.
...also, there are various reasons why even 64-bit software might need an update to run on Catalina, and why developers may decide not to test and release them until the final version of Catalina was out. However, still being 32 bit, 2 years after the demise of 32 is not one of them. If the developers are still saying '64 bit sometime next year... maybe...' then I'd look for an alternative solution, pronto.
I don't know if I can effectively combine SSD & Fusion.
(OK, some ambiguity here whether you mean Fusion Drive or VMWare Fusion... so I assume you mean Fusion Drive)
Unless you have a specific need for a single, 512GB++ library that can't be split between drives (even with judicious use of aliases/symbolic links) there is no need to mess with fusion drives - they're just something else to go wrong (and the data can be destroyed if
either the HD or SSD portion failed).
Fusion drives were a great idea in the days when more than 128GB of SSD needed a second mortgage. Now they're just there to let Apple overcharge for SSD upgrades.
I suspect I need 2TB on my new computer.
I'd recommend moving (a) infrequently used/archived files and (b) media libraries - neither of which will benefit from SSD speeds (your karaoke library sounds like a prime candidate) - to cheap external spinning rust or network-attached storage, then see if you still need 2TB built in to your machine.
Bear in mind that your iMac disc is pretty much sealed in, and if your iMac goes for repair you'll lose access to it for a while. It really is best practice to keep your internal drive for system files, temporary files, applications and 'work-in-progress' and have as much as possible of your long-term storage external. Use a NAS tucked out of the way if you don't want desktop clutter (then it can be accessed by any device in the house).
I don't know if SSD makes my memory needs small.
Having a SSD as the system drive
will help if you run out of memory and the system starts swapping out RAM to disk. OTOH the Mac uses spare RAM to cache files, which reduces the effect of a slow disk, so it is swings and roundabouts... However, with the 27" iMac, upgrading the RAM yourself after purchase is very, very easy - upgrading the internal storage requires major surgery.