I am a US resident on H1 since 2004. In August 2007 I got married to a Canadian who entered the US on H4 in August 7th and subsequently returned (August 14th) to Canada and continued to work for her employer in Canada through to the end of 2007. On January 1 2008, my spouse moved permanently to the US but continues to work for her Canadian employer (the government of Canada) via a teleworking option. She earned roughly 78K Canadian from her Canadian employer in 2007. She has no US sources of income in 2007 (no interest, dividends etc.). She now has a EAD card (issued in Oct 2007) and a SSN issued in Jan 2008.

For 2007, my spouse does not meet the substantial presence test (she spent less than 30 days in the US in 2007) nor the green card test, so she may be considered a nonresident alien for tax purposes. Since she is married to a resident (myself) we can also elect to treat her as a resident for tax purposes.

So, I think that leaves me 2 options:
(a) Choose to consider my spouse as a resident, file jointly as married and file tax form 2555 to exclude her foreign income
(b) File married, separately. In this case my own taxes are straightforward. Does my spouse need to file taxes given that she has no US sourced income and can be considered a non-resident for tax purposes. If she does need to file, what forms are required?

Questions.
(1) Are my 2 options above valid and is it generally preferable to file jointly and choose to consider my spouse a resident?
(2) How do I report my spouse's foreign income in a joint filing? How do I account for fluctuating currency conversion (is average acceptable?) in reporting her Canadian income.
(3) Is there anything else I should be considering here.

Thanks to the experts in advance.

Any insight experts?

1. You are resident for 2007. You can only file resident return as Married Filing Jointly or Married Filing Separately. On joint return, you must report world wide income and then claim foreign income exclusion (Form 2555) or foreign income credit (Form 1116).
Read: Your U.S. Tax Return: U.S. Citizen or Resident with Foreign Income

If you file MFJ, your spouse does not need to file return if she did not have any U.S. income. She will be considered nonresident.

2. Yes. Convert wages to U.S. dollars based on the dates she actually received the payments.

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Originally Posted by MukatA

1. You are resident for 2007. You can only file resident return as Married Filing Jointly or Married Filing Separately. On joint return, you must report world wide income and then claim foreign income exclusion (Form 2555) or foreign income credit (Form 1116).
Read: Your U.S. Tax Return: U.S. Citizen or Resident with Foreign Income

If you file MFJ, your spouse does not need to file return if she did not have any U.S. income. She will be considered nonresident.

2. Yes. Convert wages to U.S. dollars based on the dates she actually received the payments.

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Thanks very much for your answer.

I have a follow-up question concerning the foreign housing exclusion.

We are planning to file jointly, with form 2555 to claim foreign income exclusion. Since my wife rented her foreign home, it looked like she might qualify for the foreign housing exclusion. However, my wife's total income is less than the maximum foreign earned income exclusion ($85,700). Based on this, I don't think we could get any benefit from the foreign housing exclusion. Is this correct?