I know it may appear this problem started with Yosemite, but I can assure you the problem existed before that. Google the problem with duplicate sent emails in Hotmail and you'll see it goes all the way back to Microsoft's rollout of support for IMAP. Their implementation has an issue with it and has from day one.
The issue is a Microsoft problem which is why you won't see the problem with your Gmail account or most other mail services.
Changing the setting above won't stop you from seeing your sent messages on the server on your iPhone. Hotmail automatically saves a copy to the server. All this setting does on your Mac is to keep the mail app from saving a second copy there. Settings are on an account by account basis so you can leave other non-Microsoft email accounts set to save to the server if they do it correctly.
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Tim