Here's the original image I'll be using for this tutorial:
The original image. Image licensed from iStockphoto.com by Photoshop Essentials.com
The original photo.
And here's what we'll be working towards throughout the steps:
The final result. Image © 2008 Photoshop Essentials.com.
The final result.
Now that we know where we're headed, let's get started!

Step 1: Duplicate The Background Layer

With my original photo open inside Photoshop, I can see in my Layers palette that I currently have just one layer, the Background layer:
The Background layer in Photoshop's Layers palette. Image  © 2008 Photoshop Essentials.com.
Photoshop's Layers palette showing the Background layer containing my original image.
The first thing I need to do is duplicate the Background layer, so I'll use the quick keyboard shortcut, Ctrl+J (Win) /Command+J (Mac). I now have my copy of the Background layer showing in the Layers palette, which Photoshop automatically names "Layer 1":
The Layers palette showing the Background layer with the copy of it above, named 'Layer 1'.  Image  © 2008 Photoshop Essentials.com.
The Layers palette showing the Background layer with the copy of it above, named 'Layer 1'
To keep things easier to follow as we go along, and as a good habit to get into, I'm going to rename this layer to something more descriptive. Since "Layer 1" will eventually become the smaller, cropped version of the photo, I'm going to double-click on the name of the layer and change its name from "Layer 1" to "Smaller version":
Renaming a layer in Photoshop. Image  © 2008 Photoshop Essentials.com.
Double-click on the name "Layer 1" and change the layer's name to "Smaller version".

Step 2: Create A New Layer Below The 'Smaller Version' Layer

The next thing we need to do is create a new layer below the "Smaller version" layer, so it ends up between the two layers we currently have. What most people would do here is click on the Background layer to select it and then create a new layer, since by default, Photoshop always creates your new layer directly above the layer currently selected in the Layers palette.
Here's a neat trick I prefer to use instead, and if you don't know about it, once you do know it, you'll use it a lot. Rather than creating a new layer above the currently selected layer, you can tell Photoshop to create it below the currently selected layer by holding down the Ctrl key (Win) / Command key (Mac) while you click the New Layericon at the bottom of the Layers palette, as I'll do here:
. The New Layer icon in the Layers palette in Photoshop.  Image  © 2008 Photoshop Essentials.com.
Hold down 'Ctrl' (Win) / 'Command' (Mac) as you click the New Layer icon to create a new layer below the 'Smaller version' layer.
And now, thanks to that little trick, Photoshop has created a new blank layer for me directly below the "Smaller version" layer:
A new layer added in Photoshop.  Image  © 2008 Photoshop Essentials.com.
The new layer, again named "Layer 1", created below the "Smaller version" layer.
Since I renamed the previous "Layer 1" to "Smaller version", Photoshop has gone and named this second new layer "Layer 1" in its place. I'm going to double-click the layer's name and rename it to "Clipping mask", since in a moment, we're going to be using this layer to "clip" the layer above it:
Renaming a layer in the Layers palette in Photoshop.  Image  © 2008 Photoshop Essentials.com.
Double-click on the name of the new layer and rename it "Clipping mask".

Step 3: Drag Out The Shape Of The Smaller Photo With The Rectangle Tool

With the "Clipping mask" layer selected in the Layers palette, select the Rectangle tool either from Photoshop's Tools palette or by pressing U on your keyboard:
The Rectangle Tool in Photoshop. Image  © 2008 Photoshop Essentials.com.
Select the Rectangle tool.
The Rectangle tool draws rectangular vector-based shapes, and with it selected, I'm going to drag out the approximate shape and location of my smaller, cropped photo. I want to bring focus and attention to the subject of the photo, which in this case is the guy in the kayak, so I'll drag out a rectangular shape around him:
Dragging out the shape of my smaller photo. Image  © 2008 Photoshop Essentials.com.
Drag out the approximate shape and location of the smaller version around your subject.
With the vector shape drawn, notice what's happened in the Layers palette. The "Clipping mask" layer, which was a normal, blank layer a moment ago, has now become a vector shape layer:
A Shape layer appears in the Layers palette in Photoshop. Image  © 2008 Photoshop Essentials.com.
The "Clipping mask" layer has become a shape layer.

Step 4: Use The Vector Shape To Create A Clipping Mask

Now that we have the shape of our smaller, cropped version of the photo drawn out, we can use this shape as a clipping mask, which will "clip" the layer above it to the dimensions of the shape. To do that, hold down the Alt key (Win) / Option key (Mac) and move your mouse cursor directly between the "Smaller version" and "Clipping mask" layers, until you see your cursor change into the clipping mask icon (circled in red below):
Creating a clipping mask in Photoshop. Image  © 2008 Photoshop Essentials.com.
Hold down Alt (Win) / Option (Mac) and move your mouse directly between the two layers until your cursor changes to the clipping mask icon.
Once your clipping mask icon appears, simply click with your mouse to create the clipping mask. It won't seem like anything has happened yet in your image, but in the Layers palette, the "Smaller version" layer will indent to the right, indicating that it's now being clipped by the vector shape below it:
The clipping mask has been created in Photoshop. Image  © 2008 Photoshop Essentials.com.
The Layers palette now showing the "Smaller version" layer clipped by the vector shape layer below it.
Nothing much has happened yet to the image, but we're about to change that. We're going to create the appearance of our smaller, cropped photo around the subject by adding a couple of layer styles to the vector shape.

Step 5: Add A White Stroke To The Vector Shape To Create The Border Of The Smaller Photo

Make sure the "Clipping Mask" layer is still selected in the Layers palette (selected layers are highlighted in blue), then click on the Layer Styles icon at the bottom of the palette and select Stroke from the list of layer styles that appears:
Photoshop Layer Styles. Image  © 2008 Photoshop Essentials.com.
Click on the vector shape layer to select it, then click the Layer Styles icon at the bottom of the Layers palette.
This brings up the rather massive Layer Style dialog box set to the Stroke options in the middle column:
The Layer Style dialog box in Photoshop Image  © 2008 Photoshop Essentials.com..
The Stroke options in the Layer Style dialog box.
There's three options we want to change here, and I've circled them in red in the screenshot above. I've set myStroke Size to 12px to create a standard photo border around my smaller photo. Depending on the size of the photo you're working with, you may find that a different value works better. Below that, make sure Position is set to Inside. This means our stroke will appear inside the boundaries of the shape. By default, Position is set to "Outside", which causes the corners of the stroke to appear rounded. We want our corners nice and sharp, and "Inside" does that for us. Finally, by default, Photoshop sets the stroke color to red, which makes absolutely no sense, and obviously we don't want a red border around our image, so change the stroke Color to white by clicking on the color swatch and selecting white from Photoshop's Color Picker.
Here's what my image looks like so far with the 12px white stroke applied:
The image with the white stroke appearing around the smaller version of the photo. Image  © 2008 Photoshop Essentials.com.
The smaller photo is now visible with the white 10px stroke applied.
Don't exit out of the Layer Style dialog box just yet. We have one more layer style to apply.

Step 6: Apply A Drop Shadow

With the Layer Style dialog box still open, click on the very first layer style at the top of the list on the left, Drop Shadow. Make sure you click directly on the words "Drop Shadow" and don't simply click inside the check box to the left of them. We want to bring up the options for the drop shadow effect, and you need to click directly on the words themselves for that.
Selecting a Drop Shadow layer style in Photoshop. Image  © 2008 Photoshop Essentials.com.
Click directly on the words "Drop Shadow" at the top of the list of layer styles on the left.
This changes the options in the middle column of the the Layer Style dialog box from the Stroke options to the Drop Shadow options. Lower the Opacity of the drop shadow to around 50% so it doesn't appear so dark, then change theAngle of the shadow to 130°. Finally, set the Distance to around 10 pixels, although you may need to increase this amount if you're using a larger image than the one I'm using:
The Drop Shadow options in the Layer Style dialog box in Photoshop. Image  © 2008 Photoshop Essentials.com.
The Drop Shadow options in the Layer Style dialog box.
Here's my image now with both the white stroke and the drop shadow applied:
The drop shadow applied to the image. Image  © 2008 Photoshop Essentials.com.
The smaller photo now has the white stroke and the drop shadow applied.

Step 7: Use 'Free Transform' To Rotate And/Or Resize The Shape As Needed

If you need to rotate, resize or reposition your vector shape at this point, make sure the shape layer is selected in the Layers palette, then use the keyboard shortcut Ctrl+T (Win) / Command+T (Mac) to bring up Photoshop's Free Transform box and handles around the smaller photo.
To move the shape, click anywhere inside the Free Transform box and drag the shape to a new location, or use the arrow keys on your keyboard to nudge it. To resize the shape, click and drag any of the Free Transform handles. To simply make the shape larger or smaller while keeping the same proportions for width and height, hold down theShift key as you drag any of the corner handles. Holding down Alt (Win) / Option (Mac) as you drag will cause the shape to resize from the center rather than from the side or corner opposite from where you're dragging. Finally, to rotate the shape, click and drag your mouse anywhere outside of the Free Transform box:
Rotate, reposition and resize the shape as needed with the Free Transform command in Photoshop. Image  © 2008 Photoshop Essentials.com.
Resize, reposition and/or rotate the shape of the smaller photo as needed using "Free Transform".
Press Enter (Win) / Return (Mac) when you're done to accept the transformation. Rotating the shape adds a bit more excitement to the image. I've also made slight changes to the size and position of my shape. And with that, our smaller cropped photo around the subject is now complete! We'll finish the effect off by colorizing and blurring the original image in the background next.
We're almost done. All of the work on creating the illusion of the smaller, cropped photo inside the main image is complete, and all that's left to do now is some work on the original image in the background. There's all sorts of things you could do with it. You could technically leave it alone and be happy with what you have at this point, but now that we've increased the focus on the main subject, the idea is to lessen the focus on the rest of the image that's in the background. You could desaturate it and make it black and white. You could add a simple Gaussian Blur filter to blur out the background. You could use Levels or Curves to lighten the background and give it a "washed out" appearance. There's plenty of options, and you certainly don't have to do what I'm about to do here, which is to colorize it and add a Radial Blur effect, but if you do want the same look for your background, here's how you do it.

Step 8: Use The Eyedropper Tool To Sample A Color From Inside The Smaller Photo Area

Select the Eyedropper Tool from the Tools palette, or press I on your keyboard to select it. I'm going to use the Eyedropper to sample a color from inside the smaller photo area and then use that color to colorize the original image in the background:
The Eyedropper Tool in Photoshop. Image  © 2008 Photoshop Essentials.com.
Select the Eyedropper tool to sample a color from inside the smaller photo area.
With the Eyedropper selected, I'm going to click somewhere on the helmet of the guy to sample that blue color:
Sampling a color from a photo in Photoshop. Image  © 2008 Photoshop Essentials.com.
Sampling a color from the helmet.
Notice that my foreground color in the Tools palette has now changed to that blue color I just sampled. I can now use this color to colorize the original photo in the background, using a Hue/Saturation adjustment layer:
The Foreground color swatch in the Tools palette in Photoshop. Image  © 2008 Photoshop Essentials.com.
The foreground color in the Tools palette has changed to the blue color sampled from the helmet.

Step 9: Colorize The Background With A Hue/Saturation Adjustment Layer

Click on the Background layer in the Layers palette to select it. Then click on the New Adjustment Layer icon at the bottom of the palette and select Hue/Saturation from the list:
Selecting a Hue/Saturation adjustment layer in Photoshop. Image  © 2008 Photoshop Essentials.com.
Click on the "New Adjustment Layer" icon at the bottom of the Layers palette and select "Hue/Saturation".
This brings up the Hue/Saturation dialog box, which I'm going to use to colorize my background. No need to start dragging sliders around to select a color here. I've already sampled my color from the image, so all I need to do is click the Colorize option in the bottom right corner of the dialog box:
The Colorize option in the Hue/Saturation dialog box in Photoshop. Image  © 2008 Photoshop Essentials.com.
Select the "Colorize" option in the Hue/Saturation dialog box.
Click OK to exit out of the Hue/Saturation dialog box. Photoshop uses the sampled color to colorize my original image in the background:
The background is now colorized with the sampled color. Image  © 2008 Photoshop Essentials.com.
The original image in the background is now colorized with the sampled color.

Step 10: Duplicate The Background Layer Once Again

Before we go applying our Radial Blur, let's duplicate the Background layer one more time so that we have a separate layer on which to apply the filter, since we never want to touch the original pixel information of our image on the Background layer. Select the Background layer in the Layers palette, then press Ctrl+J (Win) / Command+J(Mac) to duplicate it. Double-click on the new layer's name and rename it "Radial Blur:
Duplicate the Background layer once again and name it 'Radial Blur'. Image  © 2008 Photoshop Essentials.com.
Duplicate the Background layer once again and rename it "Radial Blur".

Step 11: Apply The Radial Blur Filter To The New Layer

With the new "Radial Blur" layer selected in the Layers palette, go up to the Filter menu at the top of the screen, select Blur, and then select Radial Blur, which brings up the Radial Blur dialog box. First, set the Blur Method toZoom, then set the Quality to Best. The Amount option at the top determines how much of a blur effect you'll get. I'm going to set mine to 40, but you may want to to use a different value. The Blur Center option in the bottom right of the dialog box determines where the blur will originate from in your image. Try to position the blur center close to where the subject in your photo is by clicking at that approximate location in the Blur Center box. It's not the most accurate thing in the world and it make take you a couple of tries before you get it right, so don't be afraid to undo the filter with Ctrl+Z (Win) / Command+Z (Mac) and try again if at first you don't succeed:
The Radial Blur dialog box in Photoshop. Image  © 2008 Photoshop Essentials.com.
Filter > Blur > Radial Blur to bring up the Radial Blur dialog box. Change the options circled in red.
Click OK when you're done to exit out of the dialog box and apply the radial blur to the image:
The Radial Blur filter applied to the image in Photoshop. Image  © 2008 Photoshop Essentials.com.
The image with the Radial Blur filter applied.

Step 12: Lower The Opacity Of The Radial Blur Layer

This last step is optional, but I think my radial blur is too intense. I want it to blend in more with the original image on the Background layer, and I can do that simply by going up to the Opacity option at the top of the Layers palette and lowering the opacity to around 60%, which I think works nicely:
Lowering the opacity of the Radial Blur layer in Photoshop. Image  © 2008 Photoshop Essentials.com.
If needed, lower the opacity of the Radial Blur layer to blend the effect in with the original image on the Background layer below it.
For comparison, here's my original image once again:
The original image once again. Image licensed from iStockphoto.com by Photoshop Essentials.com.
The original image once again.
And here, after lowering the opacity of my Radial Blur layer, is my final "photo within a photo" result:
The final 'photo in photo' effect. Image © 2008 Photoshop Essentials.com.
The final "photo within a photo" result.
And there we have it! That's how to create a photo within a photo with Photoshop!
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That may be fine for some people, but what if you're not one of these "some people"? What if you prefer having access to all of Photoshop's filters directly from the Filter menu, the way things used to be? As we'll see, this isn't just about a personal preference. Being forced to select filters from the Filter Gallery can actually make Smart Filters a bit less useful than they were before. Let's look at the problem, and then we'll learn how to easily fix it.
First, the problem. Here's an image I currently have open in Photoshop CS6 (classic car photo from Shutterstock):
Classic pink car at beach. Photo licensed from Shutterstock by Photoshop Essentials.com
The original photo.
Let's say I want to apply the Cutout filter to this image, one of Photoshop's more popular creative-type filters. Let's also say that I want to apply it as a Smart Filter, which will keep the Cutout filter fully editable in case I want to make changes later. To apply the Cutout filter, or any filter, as a Smart Filter, I first need to convert the layer my image is sitting on into a Smart Object. If we look in my Layers panel, we see my photo sitting on the Background layer. To convert the layer into a Smart Object, I'll click on the small menu icon in the top right corner of the Layers panel:
Clicking the menu icon in the Layers panel. Image © 2013 Photoshop Essentials.com
Clicking the menu icon in the Layers panel.
Then I'll choose Convert to Smart Object from the menu that appears:
Choosing Convert to Smart Object from the Layers panel menu. Image © 2013 Photoshop Essentials.com
Choosing Convert to Smart Object from the menu.
The photo still looks the same in the document window, but a small Smart Object icon in the lower right corner of thepreview thumbnail in the Layers panel tells us the layer is now a Smart Object (Photoshop has also renamed the layer from Background to Layer 0):
A Smart Object icon appears in the layer preview thumbnail. Image © 2013 Photoshop Essentials.com
We know it's a Smart Object by the small icon in the preview thumbnail.
Now that I've converted the layer to a Smart Object, I can apply the Cutout filter to it as a Smart Filter. In Photoshop CS5 and earlier, the Cutout filter was found in the Artistic group under the Filter menu, but when I open the Filter menu from the Menu Bar in Photoshop CS6, we see that something has changed. There no longer is an Artistic group, which means I can no longer access the Cutout filter from here:
The filter groups under the Filter menu in Photoshop CS6. Image © 2013 Photoshop Essentials.com
Several of the filter groups from previous versions of Photoshop are missing from the Filter menu in CS6.
In CS6, to access the Artistic group, as well as the missing Brush Strokes, Sketch and Texture groups, we need to open the Filter Gallery by going up to the Filter menu and choosing Filter Gallery:
Opening the Filter Gallery in Photoshop CS6. Image © 2013 Photoshop Essentials.com
Going to Filter > Filter Gallery.
The middle column of the Filter Gallery is where we find all of our Filter groups. We can twirl each group open or closed to show or hide the filters inside it by simply clicking on the name of a group. The Artistic group is at the very top, so I'll click on its name to twirl the group open. Then, I'll click on the Cutout filter's thumbnail to select it. The controls and options for the selected filter (in this case, Cutout) appear in the column on the right. Since this isn't meant to be a lengthy tutorial on using the Filter Gallery or on any specific filter, I'll quickly set the Number of Levelsto 8Edge Simplicity to 6 and Edge Fidelity to 3:
The Cutout filter options in the Filter Gallery in Photoshop CS6. Image © 2013 Photoshop Essentials.com
Selecting the Cutout filter from the Artistic group and setting its options.
I'll click OK to close out of the Filter Gallery, and here's my image with the Cutout filter applied:
The photo after applying the Cutout filter. Image © 2013 Photoshop Essentials.com
The photo after applying the Cutout filter.
And here's where the problem comes in. Normally when we apply filters as Smart Filters, the name of each filter we used appears below the Smart Object in the Layers panel. If we later need to go back and re-edit a filter's settings, we simply double-click on the specific filter's name. That's still the case in Photoshop CS6, with one small hitch. Any filters we had to access from the Filter Gallery (because they're no longer available to us under the Filter menu) are not listed by their actual name. Instead, they're listed under the generic name "Filter Gallery", which doesn't tell us which filter was actually used:
The Cutout filter is listed only as Filter Gallery in Photoshop CS6. Image © 2013 Photoshop Essentials.com
The Cutout filter appears only as "Filter Gallery". Not very helpful.
That may be fine in a case like this where I've only applied one filter. I can pretty easily remember it was the Cutout filter. But what happens if we add additional Smart Filters and they all had to be accessed from the Filter Gallery? I'll quickly apply two more Smart Filters to the image (Spatter from the Brush Strokes group and Diffuse Glow from the Distort group). Since I was forced to access them from the Filter Gallery, these new filters are also listed only as "Filter Gallery" in the Layers panel, making it not so easy to tell which is which:
Three Smart Filters listed in the Layers panel only as 'Filter Gallery'. Image © 2013 Photoshop Essentials.com
Three different filters, each listed only as "Filter Gallery".

Restoring The Missing Filters In The Filter Menu

Is this a huge problem? No, but it could potentially slow down your workflow. Thankfully, Adobe realized this and included the option to revert the Filter menu back to the way it used to be in every version of Photoshop before CS6, and that option is found in the Preferences. On A Windows PC, go up to the Edit menu at the top of the screen, choose Preferences, then choose Plug-Ins. On a Mac, go up to the Photoshop menu, choose Preferences, then choose Plug-Ins:
Selecting the Plug-Ins Preferences in Photoshop CS6. Image © 2013 Photoshop Essentials.com
Selecting the Plug-Ins preferences.
This opens Photoshop's Preferences dialog box set to the Plug-Ins preferences. The option we want is Show all Filter Gallery groups and names. By default, this option is unchecked. If you want to revert the Filter menu back to the way it used to be in earlier versions of Photoshop and be able to access all the filters directly from the Filter menu, simply check this option, then click OK to close out of the dialog box (note that you'll need to restart Photoshop for the change to take effect):
The Show all Filter Gallery groups and names option in Photoshop's preferences. Image © 2013 Photoshop Essentials.com
Selecting the "Show all Filter Gallery groups and names" option.
Through the magic of you not being here as I'm writing this, I've gone ahead and restarted Photoshop, and I've re-opened the same photo. I've also again converted it to a Smart Object by clicking on the menu icon in the Layers panel and choosing Convert to Smart Object:
The Layers panel showing the Smart Object. Image © 2013 Photoshop Essentials.com
We're back to just having the Smart Object itself (no filters applied) in the Layers panel.
With the Show all Filter Gallery groups and names option selected in the Preferences, I'll once again go up to the Filter menu at the top of the screen, and this time, all of the filter groups are available, just as they were in Photoshop CS5 and earlier:
All filter groups are available again from the Filter menu. Image © 2013 Photoshop Essentials.com
All groups are once again available from the Filter menu.
To access the Cutout filter, I'll choose the Artistic group, then I'll choose Cutout:
Selecting the Cutout filter from the Filter menu. Image © 2013 Photoshop Essentials.com
Going to Filter > Artistic > Cutout.
Now, this does still open the Filter Gallery, which is where we still set the options for filters like Cutout, but the important thing here is that I was able to select the Cutout filter directly from the Filter menu. I did not select it from the Filter Gallery itself. I'll use the same settings as before for the Cutout filter, then I'll click OK to close out of the Filter Gallery:
The Cutout filter options in the Filter Gallery. Image © 2013 Photoshop Essentials.com
We still use the Filter Gallery to set the options for many filters.
Just like last time, Cutout is applied to my Smart Object as a Smart Filter, but now we see an important difference in the Layers panel. Because I was able to choose the Cutout filter directly from the Filter menu this time, not from the Filter Gallery, Photoshop displays the filter by its actual name:
The Layers panel showing the Cutout Smart Filter. Image © 2013 Photoshop Essentials.com
This time, the Cutout filter is listed as "Cutout", not "Filter Gallery".
I'll quickly apply the Spatter filter by going to Filter > Brush Strokes > Spatter, then the Diffuse Glow filter by going to Filter > Distort > Diffuse Glow. Here's what my image looks like with all three Smart Filters applied (again, I'm skipping over details with the filters because this is not a tutorial on creating any specific effect):
The image with three Smart Filters applied. Image © 2013 Photoshop Essentials.com
The effect after applying three Smart Filters.
And again, because I was able to select these filters directly from the Filter menu this time, not from the Filter Gallery, Photoshop lists them by their actual filter names under the Smart Object. If I want to change a setting for any of the filters by double-clicking on its name, or re-arrange the order the filters are applied to the image by clicking and dragging one above or below another, I no longer have to guess which filter is which:
Each Smart Filter is now listed by its actual name in the Layers panel. Image © 2013 Photoshop Essentials.com
Each Smart Filter is now listed by its actual name, not as "Filter Gallery".
One thing to keep in mind, though, is that even with the Show all Filter Gallery groups and names option checked in Photoshop's Preferences, if you select a filter from the Filter Gallery rather than from the Filter menu in the Menu Bar, it will still appear as "Filter Gallery" in the Layers panel when you apply it as a Smart Filter. If you want the filter's actual name to appear, you must select it directly from the Filter menu.
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