I saw an advertisement and tried to duplicate the effect of a top layer with lettering cut out and the layer underneath like an inch below it. So when you look at it, does it look like the white underneath is lower than the red on top, or do I need to change the shading to make it look that way.

I think, after you duplicate the layer, go to the original layer, not the dupe and lower the opacity a lot, use your move tool to pull down the letters and they should be white, set the opacity to your liking.

Remove the background first, I think you click alpha to selection before you do that, It has been a long time.

It does look like there is a distance between the two layers. The shadows on the spikes in the M's are offset from the top layer and this gives a very distinct impression of separation.

To me, the separation looks to be in the 1/4 - 1/2 inch range. I'd expect the shadows to be more blurred / indistinct with a larger separation, but it really depends on the light source. My impression is based on what I'd expect from a typical photographic light with reflector/umbrella. On the other hand, direct sunlight would give much sharper shadows.

I think it would be helpful if you added some thickness to top layer. For example (exaggerated):

Duplicate layer
Fuzzy Select the red region.
"Filters->Decor->Add Bevel..."
"Select->Invert"
"Edit->Cut"

Thanks for the feedback...at least I am on the right track!

*next try...used the rusted paper script for the lower layer to see how it looks with textures.