Her parent's cannot claim her if you file a joint return unless that joint return is only to claim a refund and there would be no tax liability for either spouse on separate returns. Below are the requirements that her parents have to meet to claim her.

Qualifying child

• They are related to you.
• They aren't claimed as a dependent by someone else.
• They are a U.S. citizen, resident alien, national, or a Canadian or Mexican resident.
• They aren’t filing a joint return with their spouse.
• They are under the age of 19 (or 24 for full-time students).
  • No age limit for permanently and totally disabled children.
• They live with you for more than half the year (exceptions apply).
• They didn't provide more than half of their own support for the year.

It is the choice of you and your wife whether you file jointly or separately. If you file jointly, they cannot claim her as a dependent. Your return would be correct and the parents return would not.

You and your wife cannot file jointly if her parents are claiming her as a dependent (IRS rule).

See: https://turbotax.intuit.com/tax-tips/family/rules-for-claiming-a-dependent-on-your-tax-return/L8LODb...

thank you very much!  Turbo Tax was very confusing here; even after checking the box that my spouse would be claimed as a dependent on someone else's return, it still instructed me to file Married filing Jointly!  Then at the end in the Review, it alerted me ... 

thanks for the reply!!

You can file jointly/separately. It is your call, not the parents. If you want to allow them to do that then that is okay and your choice, but you will likely pay higher taxes by doing so. Just because they claim her that does not supersede your right to file jointly.

If you file jointly, they will lose her exemption. That is the IRS rules.