Flash Storage = hard disk, without the disk (solid-state memory replaces the mechanical spinning disk).
RAM = 2gb in 2006 is roughly equal to 4gb in 2013 (programs have become more demanding).
i5 vs. i7 = i7 is desirable for certain, more-demanding programs. None of the programs/activities you mention would benefit - this is one place where you can save your money. Best analogy I can offer is that my Nissan Altima comes with a choice of engines, 2.5 liter and 3.5 liter. I have no doubt the 3.5 liter is wonderful, but for the kind of driving I do (no faster than 80mph on the Interstate, no more than 2 passengers), my 2.5 liter barely breaks a sweat (and I've never broken into a cold sweat when accelerating to highway speed or passing 18-wheelers). Consider the i5 to be that 2.5 liter.
A key factor with Macbook Air is that you can't upgrade Flash or RAM after purchase, so if you plan to keep the Air as long as you've had the iMac, I'd go with 512gb Flash, 8gb RAM. (the extra 256gb is enough storage for nearly 12,000 20mb photos in RAW format, or over 42,000 6mb JPGs).
Several have suggested using outboard storage (NAS = network attached storage), which would allow you to spend less on Flash Storage (which is relatively expensive). In your case, this may be an unnecessary complication. You don't seem the type who would want to manage "what goes where" on an ongoing basis. What I do recommend is a simpler, external hard disk for the sake of Time Machine backup. If you value those photos at all, you need a backup, and Time Machine is built into OS X - it just works.
The one issue I'll raise is the size of the screen. At some point, you may want to get yourself an external monitor of at least 21" (same size as your iMac). No need to do it immediately, but if your eyes are getting as old as mine, bigger is better. ;-) The Air is a fabulous device, but its focus is on portability. If you spend most of your time at a desk, why sacrifice screen size at those times?
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Thanks to you all for responding. I think I should go with the 256 i5 and 8gb. Can I ask one more thing? Do you think the migration assistant will work and if so that I can order from the Apple store and have it delivered? Or should I lug my iMac to the store and ask them to transfer everything. Please don't ask me if I am backed up in the cloud. I THINK I am but can't figure out how to verify.
Migration Assistant does work well, but there's always something to be said for having some help with an important and unfamiliar process.
If by the cloud you mean iCloud... only limited things are saved to iCloud from a Mac, mostly Contacts and Calendars.
If you're using a separate cloud-based backup service, they undoubtedly have a web page where you can monitor things like most recent backups, available space, etc.
