I am on F1 visa since September 2005 and my wife is on H1B since oct 2008. I have income from my school job. Officially I have to file 1040 NREZ ( for non resident) form and my wife have to file 1040 form(for resident). My query is whether we should file taxes together or we should file taxes separately on the above said form. If we file taxes separately, then should we show that we are married but filing taxes separately...
I will appreciate for your answers...

For you (assuming you entered U.S. in 2005):
Choice 1: You can file non-resident tax return.
Choice 2: You can file resident tax return as Married Filing Jointly. You will get standard deduction of $11,400 and exemptions ($3,650 each) for both of you.

Your wife:
Can file joint return or as married filing separately.