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The ”Optimize” setting will automatically remove originals from your phone as more space is needed. A very small thumbnail remains on your phone so you can find what you need. If you want to keep certain ones at full resolution, make them favorites.

Don‘t delete photos manually from your phone. The phone will manage its own space when “optimized” is on. Even if your phone storage is nearly full due to photo storage, ones not viewed in a while will be automatically off-loaded when more space is needed for other things. It works — don’t micromanage.

FYI, I have 37,000 photos in my library but it’s only occupying 37GB on my iPad mini. It’s well over 400GB on iCloud and on my HD backups.
I had no idea that favoriting kept them at full resolution.

Edit: From a brief check any video (including the video portion of a Live Photo) may still be offloaded.
 
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The "Optimize iPhone Storage" option is a good solution, except that you cannot select which photos you want to optimize and which ones you do not. This is important because I want certain photos to be accessible even if I have no internet connection but the ones I don't look at often, I can put in the cloud and right now it's all or nothing.

You will retain a ‘low quality’ version of all photos.
This low quality version is, in my experience, indistinguishable from the full res version when watched on the phone or iPad at normal zoom.
The main reasons you will need the full res version is if you want to email it (in which case you’ll need internet access anyway) or to print it (in which case you will probably have access to your wi-fi anyway).
 
I actually see from searching how to do this - which is to turn off iCloud Photos in the settings. But the question I have not been able to find the answer to is, once I delete the photos with this setting turned off, it will delete them on the iPhone -but will if I turn it back on, will it sync with iCloud and also delete it off iCloud at that point?

If the answer to the question is that it will not delete it off iCloud, only iPhone and I can still see the photos in my Photos app, how do I distinguish on my phone what's on iCloud vs what's actually stored on my phone?

Thanks for your help. This topic has confused me for a while now. Just wanted to get full clarity.
 
Switch on ‘Optimise iPhone storage’, is the only reasonable and official solution to your ‘problem’.
You will not even notice it is ON, other than you will have loads of available space.

Apart from that, I am pretty certain that if you unlink a device from iCloud photos, then delete photos from that device, when you re-link the device to iCloud the photos from iCloud (all of them) will download and merge with those already on the device
, and viceversa.
Got it. What if I get a second device? Will I be able to keep all the photos on one device but optimize on another?
 
Got it. What if I get a second device? Will I be able to keep all the photos on one device but optimize on another?

Yes.

I have Download and Keep Originals set up on my iPhone and 512GB-1TB iPads but use Optimize iPad Storage on iPads with 256GB or less. My full iCloud Photo library is ~40GB but it only uses ~3.5GB with optimize (on iPadOS 14.8).

I think there might be a bug on iPadOS 15 at the moment since I've seen complaints about optimize using more storage compared to 14. On my iPad mini 6 with optimize enabled, Photos takes up ~10GB storage.
 
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