WordPress allows you to categorize your blog posts. There are also some plugins that let you work with tags. Seemingly both of them can be used for the same thing – qualify your posts. However, I think they are different, or at least my usage is different. On this blog I use categories for topics and tags for keywords. Both can be used for navigation, but categories present structured navigation, its language is specific to this blog. The keywords are global, which would stand their context and meaning even outside this blog. Posts by Carthik Sharma and Lorelle give the best explanation.
Why do I need both? One is because I write on a subject, and it involves many things, which I want the readers to be able to use to navigation. For example, when I write about programming I might talk about some book. Programming is the topic here, hence a category, and the book name is the keyword, hence a tag.
How do you use them? Do you find it confusing on this blog?