This patch allows you to use any ExGFX file you want in a vanilla Mode 7 boss battle without the castle destruction cutscenes getting messed up afterwards. It's not compatible with files 100-FFF, so stick whatever boss GFX you want in 80-FF.
What about the palettes? AFAIK they are hardcoded and theres no way to edit them easily
This patch only fixes some graphical garbage when using ExGFX with the castle destruction sequences. Expanding the palette used by the vanilla Mode 7 bosses would require a new patch altogether.
In any case, you can repoint the palettes used by some stuff with some hex edits and then edit it manually with LM, but you would be still limited to half a color bar in most cases (sans for Iggy, Larry and Reznor, who can make use of custom palettes due to being proper sprites rather than objects).