What material should I use for painted window jamb extensions?
For jamb extensions, I'll always use wood (pine/poplar) over mdf, as the tiniest bit of moisture on mdf will swell it like old cardboard. Be sure to prime every side of the wood (including cut ends) before installation.
You shouldn't try to have a gap between the extension and the window. Just butt it as close as you can and caulk with a paintable latex caulking. Avoid pure silicone, as it won't take paint.
In anticipation of casing the window, you want the jamb extension to be perfectly in-plane with the drywall. If the window is set slightly out of plumb, or there's something going on with the framing, that might mean putting a slight taper on the jamb extension before install. It's not a perfect solution, but if you find you need a taper, just mark the top/bottom of the jamb extension to where they'll be flush with the drywall and cut a straight line between the points. Rotate the jamb extension so that the cut edge is against the window and the factory edge meets casing. (You could go nuts trying to scribe the jamb extension exactly to the drywall, but your casing isn't going to conform to small wobbles and you'd have a cut edge that you'd have to tidy up a lot.) All that said, sometimes you just need to take a hammer and mash down a section of drywall that's sticking up. Stay within the boundaries of the casing and nobody but you will know what a terrible thing you did.
If you're fastening into a wood buck or framing, life is pretty easy -- just shims and nails. If it's into concrete, I'd try to build the entire unit with screws at the butt joints and then insert it into the window opening. You'll still need a few attachment points into the concrete, but it'll hold itself together without too much strain.
Be accurate, even, and square with the jamb extensions and the casing will go more easily. Having said that, I will occasionally intone the carpenter's creed: &quot;Caulk and paint make you the carpenter you ain't.&quot;