The relation $\tan^{-1}(\frac{1+x}{1-x})=\frac{\pi}{4}+\tan^{-1}x$ holds true for all $1.$ $ x\in \mathbb R$, $2.$ $ x\in (-1,\infty) $, $3.$ $ x\in (-\infty,1) $, $4.$ $ x\in (-\infty,2)$
I took RHS=$\frac{\pi}{4}+\tan^{-1}x=\tan^{-1}1+\tan^{-1}x=\tan^{-1}(\frac{1+x}{1-x})$,if $x\gt0, x\lt1$
(using the property $\tan^{-1}x+\tan^{-1}y=\tan^{-1}(\frac{x+y}{1-xy})$, if $x\gt0,y\gt0,xy\lt1$)
Therefore, my answer is $x\in(0,1)$, which is not an option.
The answer in the key is $2. $ $x\in(-\infty,1)$.
Looks like, they just used $x\lt1$ condition and not $x\gt0$. Why?
A drawing might help.
Construct a right-angle triangle $\triangle ABC$ with sides $\overline{AB} = 1$ and $\overline{CB} = |x|$. Then $$\measuredangle BAC =\arctan |x|.$$ Produce $AB$ to $D$ so that $\overline{BD} = \frac{|x|}{|y|}$. As a consequence you have $$\measuredangle ADC = \arctan |y|.$$
By Euclid's Theorem, if $x^2 < \frac{|x|}{|y|}$, i.e. $|x|<\frac1{|y|}$, the angle $\angle ACD$ is obtuse. Draw from $D$ the line perpendicular to $AC$ and let $H$ be the foot of the altitude.
Similarity $\triangle ABC \sim \triangle ADH$ yield $$\overline{DH} = \frac{|x|(|x|+|y|)}{|y|\sqrt{1+x^2}},$$ and $$\overline{CH} = \frac{|x|(1-|xy|)}{|y|\sqrt{1+x^2}}$$.
External angle theorem gives $$\angle HCD= \arctan |x| + \arctan |y|,$$ i.e. $$\arctan\frac{|x|+|y|}{1-|xy|}=\arctan |x| + \arctan |y|,$$ valid for $|xy|<1$. Thus we have, using $\arctan$'s odd simmetry,
You can analyze the situation when $|xy|>1$ in the same manner, considering that now the angle $\angle ACD$ is acute.