I would take the first option.

Good luck

I'm not sure I totally get the concern, but it seems that the window opening is not straight/plumb? so there will be more tile showing at the top of the window opening than the bottom? I think the trim can help disguise this but I would worry that the linearity of the tile would accentuate it. That is, it would make it obvious that 3 little tile sticks are visible at the bottom and 4 little tile sticks are visible at the top, I hope that makes sense. Something to test out.

The "gap" between trim and wall, meaning the 3 inches of painted wall between the trim and the cabinet side??

@Rebasheba: yep! That is my concern right now, potentially having 2 or 3 tiles at the bottom but maybe 3 or 4 up top if we decide to bring it all the way up.

The “gap” meaning if we only tile up to the cabinets, the thickness of the tiled vs untiled part of the wall will create a gap between the trim and wall. Hope that makes sense!

We were going to tile around the windows until out tiler told us our old house was wonky enough that it would be apparent. We settled for only tiling the area around the hood to the ceiling and leaving the window areas even with the backsplash.

We had a window area over the sink that was sided by an upper cabinet (to the ceiling) on one side and an exposed chimney on the other. The other window area had just lower cabinets. I am glad we did what he recommended. The trim around the uppers hid the wonky but tile would be unforgiving.

I would think the trim would be able to be relieved in back where it falls over the tile. Or build up a bit behind the frame pieces, above the tile line as here (from reddit https://www.reddit.com/r/Renovations/comments/11ulf7d/framing_kitchen_window_with_consideration_for/)