Are you not doing the wood wrapped inside the window alcove now? How high are you taking the backsplash everywhere else? Up to the cabinets? Does your tile have a bullnose or a decent egde? I would run the backsplash straight across from under the cabinets until the edge of the window alcove, or to the wood trim if you put it in there.

In the first paragraph, you said 'not' in the window knock out area, and the last sentence asked about the window knock out area, so I'm a little confused...But I'd leave the sides of the window knock out area in the wood or painted sheetrock...no tile. HTH

Thanks for the feedback rhome. I'm looking for feedback on the whole area and yours was excellent. I think I'm leaning that way. At first I was describing my main problem which is if I tile (up to the cabinets), should I extend the tile up, or leave it at counter level by the windows. I wasn't sure how it would look as this small strip of painted drywall is the only painted area in that part of the kitchen.

I had also considered tiling some of the window knockout area. But, I'm leaning toward what you described.

Other opinions??

Just to confuse things, I'd definitely wrap the tile on the wall right up to the ceiling and strongly consider tiling either the shelf or the entire knockout area. Whichever I did would be with the idea of creating a unified overall picture that highlights the window and its wonderful view.

BTW, it may be a little late for this, but I think it would look wonderful if the window trim were dark, similar to the cabinets, which would keep it from advancing and allow the eye to continue, even as it defined a nice inside-outside separation.

no thoughts to help you, but I what a beautiful view outside your kitchen window!

Here is a photo of ours. Don't know if that will help.

Your window configuration looks similar to Sherrilea's.
Check out the 'Finished Kitchens Blog' to view her design.