These settings pictured below are toggled by drawing/sheathing your weapon. They apply only to target cycling keybinds (default num4, num6), not to tab targeting.


However, it sounds like what you really need isn't a target filter at all but a "Target Nearest NPC or Object" keybind. It's on the Targeting tab just below "Target Nearest Enemy". Set that to something close to home position like [V] because you will be using it a lot (also, set Target Nearest Enemy to something handy as well--I recommend [G]). This will allow you to interact with NPCs and quest objectives even if a million people are standing on top of them.