Hi Quakermo. My guess is that you will continue the look on the new exterior walls with the same siding. If this is the case then yes I would cut the existing siding back no more than 1 1/2 inches from the new exterior wall.
The cut should be straight and plumb. After you have attached the new exterior wall to the existing bare sheathing, you can add a 2x2 right into the corner where the 2 walls meet. This is so you can butt the new siding into the 2x2 without any fancy mitre cuts. This leaves a nice clean look.
This would also depend on how existing inside corners are presently finished.