Using Illustrator's drawing tools, create a vector mask and mask the image.
Or if you need to drop out a single color or variations of that color, use the Mehdi Eraser Genuine filter. You can download it for free.
And JPEG images do not support transparency. So even if you drop out part of the image, the transparency cannot be saved in a JPEG image.
You can create a TIFF or PNG with Alpha channel transparency of your edited image.
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