Married couples can file taxes jointly or separately. Both have their advantages and disadvantages but generally, for spouses earning more or less the same amount of money, especially if both are high-income earners, filing separately might allow them to pay less tax as filing jointly would probably make their combined income reach a higher tax bracket.
For this problem, calculating the income that Steve would have to report would only involve averaging his and Molly's income to give,
= ($50,000 + $35,000)/2
= $42,500