Ideally you should set that setting to the actual configuration of your speakers and the same you have set them in Windows Sound control panel.Thank you for this clarification. Can you tell me if Kodi is set as the "decoder" of all formats with the exception of DTS:X and Atmos, do I still need to configure Windows as "5.1" or "7.1" in order for the channels to make it where they're supposed to, or can I leave it set as "stereo" and the LPCM output from KODI will still convey the surround encoded LPCM to the AVR properly?
DTS-X and Atmos are not "selectable". If you want them you simply select TrueHD and DTS-HD in the passthrough options (and E-AC3 if you have Atmos files in E-AC3 format).
Whatever is set as passthrough enabled is handled entirely by your receiver. Kodi simply transfers the audio stream, through HDMI, to your receiver.