I would not go all the way up the wall on the tub to match the backsplash above the counter on the vanity. My concern would be that it would look too boxed in. I think you may have to put some different backing material on the wallboard which may increase your budget. You will need to ask an expert about the backing for tile over sheetrock.

I would tile up the side of the wood to the bottom of the countertop. Water damage to the wood might occur if you don't tile over the wood. This would hide the wood completely.

This bathroom presents some unique challenges. I think as long as your happy with it, you could go either way.

I disagree. I would carry the backsplash from the vanity to continue around the space around the tub to make it more cohesive. The tile at the sides of the vanities is placed as protection from any splashing. You should keep that.

Tile around the tub should always go all the way up the wall to the ceiling. My family is very tall (my son is almost 6'4) and when we lived in our last house, our tile was only a little bit higher than 6 feet. Needless to say from the years of all of us showering and the wall getting wet, everything buckled and my husband had to take everything down around the tub and re-tile.

Thank you. This tub doesn't have a shower, it's just a corner garden tub so we won't be getting the walls wet. The shower is in a small room off to the left of the vanity.

#1, carry the tile to the same height. Removing the tile from the wood is more then likely going to damage the wood, but if you carry the tile to the same height as the vanity, all the wood would be tiled over. You can even go taller on the tile, just add a detail or decorative piece.

Looks to me like the vanity tops are even with the bottom of the window. I would think a lot would depend on the tile that you are using. You don't want a lot of little thin cut pieces filling in space to get you to a certain point. Nor do you want grout that is too thick or thin to accomplish that.

Good point, lijksen. I wonder if that is why they kept it so low to begin with. What if I took the tile to the same height as the tile on top of the vanity? It would then be about 8 or so inches on either side of the window. I am thinking about doing something more transitional so I would have light countertops (going with a laminate) and light color subway tile.

I agree with Sandra and Rhoni's points.
You could bring the tile to either counter height or the height of the vanity tile/height of the window.
If you can afford it go for granite or another solid surface, it'll transform your space that much more.

I would go with a solid surface or granite with undermount sink. Remnants should be inexpensive to find. Then measure the distance between the tub deck and window and determine how much tile space you have to cover. You might need a pencil tile or trim piece to work in with the subway. But I would tile around tub to below window.