Family with dual-country income, in U.S. on J1 visa, help!

[eskay]

I am in a very confusing tax situation, any advice is greatly appreciated.

In January 2007 my family moved to the U.S. where I was working as a J-1 scholar (not a student - a visiting research scholar) but being paid by a Canadian company. My spouse and kid are living in the U.S. with me. They are J-2 dependents for visa purposes. My spouse continues to work remotely for her employer in Canada while residing in the U.S. with me. We are all Canadian citizens.

In previous tax years I contacted CRA and they informed me we were considered Canadian residents for tax purposes, as we had essentially no U.S. income although we were living in the U.S. So previously I have filed a Canadian tax returns on Canadian income, and 1040NR in the U.S. (with no U.S. income to report).

In late 2008 I switched jobs and am since employed in the U.S. being paid by a U.S. company. I'm still on the J-1 scholar visa, but now I've been here for three years and I am considered a U.S. resident for tax purposes for the 2009 tax year according to the IRS and my employer. During 2008-2009 we had another child (born in the U.S.) and my spouse claimed Canadian parental leave EI and spent part of the year back in Canada with family. We remain U.S. residents for the majority of the year.

I am having trouble figuring out how to file taxes given that we are married and each partner has a different tax status. We have substantial ties to Canada (spouse still employed there, RRSPs, EI payments in 2009). I am considered a U.S. resident for tax purposes (in U.S. for >2 years on J1 scholar visa), my spouse is a Canadian resident for tax purposes. How we determine which country to pay taxes to first? Do we need to file a married filing jointly return in the U.S., I claim our kids as dependents in the U.S., spouse and I pay U.S. tax on our world incomes, and then pay the differences as well up in Canada, or is there some alternative that won't involve me paying Canadian taxes on my U.S. income and vice-versa for my spouse?

Thanks for any advice you can offer.