Should we file out taxes joint or separate!?

1. If you agree to file MFS, then yes, it's possibly for your wife to be claimed as a dependent by her mom if she otherwise meets all tests. Ask your mom-in-law to show you both tax returns (with and without her daughter). If you agree to file MFS and you were NOT in the US on 1/1/2016, you have to file either a 1040NR (if you have less than 183 days for the substantial presence test) or a combo 1040NR/1040 if you were here more than 183 days. Neither return allows a standard deduction. See IRS publication 519.

2. If you decide to file MFJ, doing so trumps mom if either of you has enough income to actually owe taxes. Keep in mind, if you arrived in 2016 and weren't here on 1/1/2016, you have to sign a statement (a letter) saying that you agree to be taxes as a resident alien. You would report your worldwide income for the entire, not just income since you arrived in the states. See IRS publication 519 for the letter requirements. To compare your situation with your mom in law, do the tax returns both ways (MFJ and MFS) and see how much you save vs how much she saves. Then decide if it's worth the trouble.

Note, if your wife is under 24 and a college student, there is also an education credit that follows the exemption.

To let your mother in law claim her if she qqualifies, you have to file as married filing separately - if you file a joint return, she can't claim your wife. But there are a lot of other rules for your m-in-law to meet to claim her, not just that you lived there half the year.

Married joint is better 99.9% of the time. That is better for you. MIL had to pay half her support for the WHOLE YEAR to claim her anyway, and your wife had to make less than $4000. Even if those were true, if you choose to file jointly, MIL cannot claim her, period.

Her mother probably cannot claim her. If your wife is over 24, not a student, and made more than $4050, she cannot be claimed by her mother. Also, since she is married to you, it would make her ineligible to be claimed by her mother. It's usually in your best interest to file MFJ.