US citizen married and living and working in Australia/Foreign Tax Credit and US tax return

She should file MFS in the US, probably, unless she wants to subject his worldwide income to US tax.

She may want to use foreign earned income inclusion.

@itonewbiemay come along and answer the rest. I have had this situation before but don't remember the answers and don't have time to look it up.

I would highly recommend your grand-daughter hire a competent tax professional who specializes in expat tax and understands Australian tax (as we do).

Australia has a fiscal year and its tax regimes for employment income, benefits-in-kind, and investment income are not commonly understood by US tax accountants who deal mainly with domestic US tax issues.

In addition, US tax treatment as well as reporting of Superannuation fund is something even expat tax specialists do not always agree on.  To throw a spanner in the works, income tax treaty between the US and Australia will come into play.

While MFS may seem like an easy answer for US taxpayers with spouses who are nonresident aliens, it is not the panacea because there are still complicated gift and estate tax considerations.  Furthermore, depending on each individual's finances and circumstances, it may sometimes be beneficial to elect joint filing.