Her parents dependent but my wife, claim single or married filing separately?

Filed as: Married filing separately. So her parents has a chance to claim her as dependent. If she's still attending full-time student this year and without taxable income then let her parents do it again for 2007. But if she starts working this year with incomes exceeded $3,500 then you should file: Married filing jointly in 2008, that way you got more refunds ( all her taxes ) since marriage tax penalty has changed 4 yrs ago.