@gur1 ,
On your child whom stays with your H-4 spouse, --- a child whom is a resident of Mexico or Canada and for whom you pay at least 50% of "living expenses" , can be your dependent.
So you are saying that for 2022, counting all days present in the USA ( including all visitation full days ), plus 1/3 rd of all days present in 2021 plus 1/6th of all days present in the USA spouse H-4 does not meet Substantial Presence Test -- yes ? And therefore you both want to treat H-4 as a resident for the whole in 2022 -- yes? Note that in this case full year would start from the first day she was present ( Jan 1 ? ) in the USA and end on 12/31/2022.
As a resident of USA you cannot generally take advantage of treaty benefits of another country ( generally home country) , but this does not include the double taxation reduction - because while this is included in the tax treaties, US directly includes this provision under US tax laws -- See Pub 54 >>>> https://www.irs.gov/forms-pubs/about-publication-54
Another point -- because H-4 spouse started her foreign tax home in August 2022 ( yes ? ), she will not meet the 12 month test period till at least anniversary of that date and therefore you cannot file for Foreign Earned Income exclusion till after that date --- you need a continuous 12 month period ( that spans the tax year under consideration i.e. starts or ends in the tax year) during which she can meet the 330 days away from USA requirement.
You say in 2021 , her earnings were reported as foreign -- meaning she lived and worked in Canada? -- Are you saying therefore that she actually moved / started her foreign tax home in the 2021? If that is so then I would suggest for you to prepare the return in two different ways and see which is more US tax benign to you ...
1. Prepare as filing MFJ -- including her income as if she is a resident, excluding her foreign income ( including allowable housing costs) but getting the standard deduction of a married couple
2. Prepare as filing MFS -- not showing her income ( but including the US sourced interest income in your own world income); she files nothing to the USA.
My concerns are (a) that the simplest path being MFS -- leaving her income out of USA ( and not having to pay FICA/SECA at 15.3%) , may be more beneficial than getting the extra standard deduction of approx $13,000 and (b) I am not sure if eligibility of the H-4 spouse to be a resident alien --- see this >>> https://www.irs.gov/individuals/international-taxpayers/residency-starting-and-ending-dates.
Also as I said earlier , things/steps may depend on ( i.e. eye towards ) your longer-term plans -- do you plan to settle here or go back to your home country ( India ) or settle in Canada
Is there more I can do for you ? We may be reaching a point where any further discussion may be of specific interest to you only ( and therefore PM may be better ) -- because your situation is somewhat unique.
Namaste
pk
