Final answer:
Making sure that a taxpayer's business is treated as a passive activity if it produces a loss is not a way to lower a taxpayer's effective tax rate, because passive losses are only deductible against passive income, not other types of income.
Step-by-step explanation:
The question asks which of the listed methods is not a way to lower a taxpayer's effective tax rate. Taxpayers can adjust their finances in a variety of ways to influence their taxable income and effective tax rate. Options a, b, c, and e are indeed strategies to lower taxable income or exclude income from taxes altogether. However, option d, making sure that the taxpayer's business is treated as a passive activity if it produces a loss, would not necessarily lower the effective tax rate because losses from passive activities generally can only be used to offset income from other passive activities, and not from active business income or employment income.
Investing in tax-free municipal bonds is a strategy for earning income that is not subject to federal, and sometimes state, taxes. Ensuring losses and expenses are deductible can lower the amount of taxable income. Lastly, excluding income from the tax base through various legal methods can directly reduce the amount of income subject to taxation.