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I'll start by saying I'm an enthusiast and amateur Photoshop User, and any help is much appreciated.

I have a simple PSD file containing 2 layers, an image and a font overlay. The underlying background is transparent. What I'm looking to do is place the font over the image, but remove it in a way that the font is "cut out" of the image with the transparent background visible.

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The easiest way would be to use something called knockout, which is a non-destructive process. It is basically just a layer style, so you can turn it on and off and still edit your text etc.

  1. If your image is the background layer, create a regular layer from it by either right clicking and selecting "Layer from Background..." or simply dragging the lock icon of the layer to the trash icon at the bottom of the panel.

  2. Open up the Layer Style dialog for your text layer and under "Blending Options" set the fill opacity to "0" and knockout to "Deep" *.

Photoshop Deep Knockout

*A "Shallow" knockout will cut through any transparency to the end of the group the layer is in. A "Deep" knockout will cut through all the way to (but not through) the background layer (which is why we hid the background).

enter image description here

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The easiest solution would be to select the font pixels and then clear those pixels in the background layer.

  1. Hold the Ctrl key and click the font layer thumbnail, resulting in its pixels being selected.
  2. Click (select) the image layer and then press Delete, clearing the selected pixels.
  3. Hide/Delete the font layer, exposing the "hole" in the bottom layer.

You would also need to save the file in a format that preserves transparency such as PNG.

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