Is "the letter is above her" (e.g. up on a shelf) also an acceptable meaning for this sentence?
No, that would require 'über ihr'.
How do you tell when 'sie' refers to you or her?
I also want to know how you tell when sie refers to you or her?
You cannot, because you are typing "Sie" or "sie". Both answers are accepted, so it matters not.
Not accepted "her'
ue is the same as ü and should be acceptable to Duo