The way I did my last Kindle book was this. I'm at a different computer right now so I don't have the files, I don't remember the extensions and all. If I'm misleading you on details, let me know and I'll go back and confirm.
I downloaded the Kindle previewer. Then I sent KDP my docx file and got back their conversion, which I used as a first draft. This is a zip file, which includes a file with the HTML, a file for each image, a file for the table of contents, and a control file to tie it all together. I unpacked the zip to a directory and then hand-edited the text files with Notepad++ and replaced the image files with cleaner, correctly-sized conversions produced with Corel Draw (the program I used to create the images in the first place).
The previewer will convert the directory to a single file suitable for re-uploading back to KDP. I forget now if that's AZW or P-something-something or whatever, but whatever the previewer creates.
I think it's a good idea to start with the KDP conversion because then you get a usable, syntactically correct file as a starting point. It eliminates having to figure out everything from scratch. In my case, anyway, it included a LOT of junk tags that I deleted with mass search-and-replaces. And lots of crudely done stuff that I cleaned up, like link targets are often put in not quite the right place.
The folks at KDP seem to assume that you'll upload a docx and just use their rough conversion, because they make the software and documentation really hard to find.
To directly answer your question, I'd say: Use the newest formats, but keep in mind that some things won't work on older model Kindles and you have to consider the implications. The previewer will show how your book will look on various versions of the Kindle, and you can see when stuff isn't recognized.
Obviously color won't work on the e-ink Kindles, so you want to see how things look in b&w. I had some diagrams that used color coding that made them easier to read, but this didn't look good in b&w, so I ended up making two versions of all the diagrams: one in color with the color-coding and another in clean b&w. You can make it pick the right one with CSS media queries. Oh, and you can use CSS to make images size to fill the screen.
The format of the index has changed, but the old format is still recognized. So I used the old format.
The really old Kindles don't recognize tables. If you can avoid using tables, do. But if you want a real table -- a chart with rows and columns -- there's not much choice, and I think you just have to say too bad for the oldest Kindles.
Umm, those are the things that come to mind.
As I said, I'm not at the computer where I have my actual files. If I've messed up or left out an important detail, post a comment and I'll update.
