Lattice density functional theory (LDFT) is used to investigate spin excitations in the single-impurity Anderson model. In this method, the single-particle density matrix γijσ with respect to the lattice sites replaces the wave function as the basic variable of the many-body problem. A recently developed two-level approximation (TLA) to the interaction-energy functional W[γ] is extended to systems having spin-polarized density distributions and bond orders. This allows us to investigate the effect of external magnetic fields and, in particular, the important singlet-triplet gap ΔE, which determines the Kondo temperature. Applications to finite Anderson rings and square lattices show that the gap ΔE as well as other ground-state and excited-state properties are very accurately reproduced. One concludes that the spin-polarized TLA is reliable in all interaction regimes, from weak to strong correlations, for different hybridization strengths and for all considered impurity valence states. In this way the efficiency of LDFT to account for challenging electron-correlation effects is demonstrated.