It means "really far away". For example, "Can you see those mountains way off in the distance?", meaning that the mountains are very far away but still visible. Is it commonly used? In my opinion I would say not really, but it's also not super rare or uncommon.

Yes, it's common. A very long way away.

Yes, this is a commonly-used expression. It means "very far away," and can be used both literally and figuratively, although the literal use is more common in my experience. It is usually used more in written language than spoken language. For example: "She could see a crowd of people way off in the distance." - This is a literal usage of the expression, because there is an actual object very far away that it is describing. "He had already started planning his college courses, even though college was still way off in the distance for him." - This is a figurative usage of the expression, because it is talking about an abstract event being very far away in time for this person.