There have been discussions here about that back a week or two ago. I called IRS and got their authoritative answer. Share this info with you :)
Case specifics:
1. One spouse must be able to elect to be a resident alien filing 1040 (A).
2. The other spouse is in China.
For the best interest of the couple, file this way:
1. File joint return, make the choice of “Treat non-resident spouse as resident alien”.
2. You must report the income of the spouse in China on 1040 line 7.
3. You can claim $3050 exemption for the spouse.
4. You can take a standard deduction of $9500 since you file a joint return.
5. The spouse can exclude foreign earned income up to $80,000. This would take out anything you put in line 7 in above 2, since most people in China do not make $80,000.
6. The spouse needs ITIN. File W-7. Even the spouse has never been in US, he/she can apply for ITIN by *** Filing W-7 together with the joint return ***. The spouse cannot file W-7 by itself – meaning: not attaching it to 1040.
Net effects: compared with filing separately or as single (without taking the spouse into account), your taxable income is reduced by $3050 + $4750. This could mean thousands of tax dollars depending on your tax bracket.
What you cannot do:
Neither of you cannot claim any tax treaty benefits.