The headshot will need to be on its own layer, masked out or cut out so there's no background. The background that you actually want to use will be on its own layer beneath that layer.

Then, on the headshot layer, create a layer mask -- you can do this via one of the icons in the layers palette or via the menu under Layer. Make the layer mask active (dotted white circle on gray background will be next to the eye on the layer), then use the gradient tool to put a wash of white fading to black. Where the layer mask is white, your headshot will show. Where the layer mask is black, it will be transparent. The grays between will make it fade.

If you want to control where the fade is, you can simply use the airbrush to edit the layer mask with various shades of gray.