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She will be paying part of the home expenses, 1/3 home mortgage, utilities, food, not all of our expenses but some relating to her. We do not itemize our expenses on our income tax. She will be paying about 600 a month, which is under half of her income. We will not be claiming her.

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I would think that you need an accountant to answer these wuestions or a tax attorney. You might also get information from your locsl IRS office.
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will I have to report the living expenses as income for me and then deduct actual expenses?
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She does her taxes, you do yours. All separate. All good. That way if one of you needs SNAP or HEAP, the financial end is properly sorted out. her biggest expense is probably her medical costs, typical for the elderly.
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