Let's get started!
1. Open Photoshop and select your image.
2. Extend the canvas. Go to Image, Canvas Size and double the height. Be sure to set the anchor to the top box so that it does not increase the canvas size equally on the top and bottom.
3. Duplicate the layer. Right click on the image in the Layers palette and select Duplicate Layer. Name the layers "top" and "bottom". Select the Move Tool and move the bottom layer down.
4. Flip the layer. Select the bottom layer and hit Edit, Transform, and Flip Vertical to create a mirror image.
5. Blur the bottom layer. Select Filter, Blur and Gaussian Blur and adjust appropriately.
Now we have our mirror image and it's blurred, we'll fade it out. To do this...
6. Apply a mask to the bottom layer and choose a soft brush and apply mask.
Play around with the opacity and flow of the brush to your satisfaction. NOTE: To increase and decrease the brush size, use the bracket keys to the right of "p" on a standard European keyboard.
And there you go! A nice reflection of our image.
If you want to include this image with transparency to a web page, Go File, Save for Web & Devices and select a PNG file. PNGs support transparency whereas JPEGs do not.
Here is a mockup of a webpage with the image as a PNG.
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