Compost!

Don't throw away your topsoil. Most can be improved w/o replacing. If it has ANY different color from the subsoil, it likely has more organic matter and life in it than the subsoil despite appearances. Work with what you have and improve it.

If raising the elevation by amending with compost is a problem, you could remove some and replace with compost, or preferably, remove subsoil instead so you have deeper topsoil.

You might want to get a soil test before you start so you know what you're dealing with. pH, organic matter, NPK and minor minerals.

Don't bother with potting mix, it's made for pots and is usually just compost and shredded wood, but at a much higher price per pound for the privilege.

It's hard because it's dry.

So moisten it, dig it, and amend it.

Soil that is hard and packed says it lacks adequate amounts of organic matter. In answer to your questions
1. Only if you also add organic matter.
2. Only if you need to to maintain the same height and slope that presently exists. Removing the existing mineral portion of soil usually serves no purpose.
3. Absolutely. Organic matter, compost or other vegetative waste is what that soil needs and that is a good time to add some. Potting soil (usually peat moss) may be too expensive for this purpose.
"Topsoil" is valuable only if it contains that 5 to 8 percent organic matter.