Tags are an important part of the WordPress system which add a different level of categorization to posts (apart from categories). Tags should be treated as a next level of categorization for posts and hence, are different from categories which describe the first level of post categorization.
For this post “Using Tags for Your WordPress Blog Posts”, the Categories for the post could be “WordPress” and the tag for this post will be “wordpress tags”. Notice I used small letters for tags as capitalization does not matter when it comes to tags.
Now, note that a separate page will be created for the tag “wordpress tags” and all posts with the tag “wordpress tags” will show up on that page. Hence, it is important that you create tags which can have mutiple posts associated with it. Do not create a tag only for a particular post.
Think of the future value of the tag. Treat it just like a category, the only difference being that tags will be more specific than categories. At the same time, they should not be so specific that they point only to a single post in your whole blog. In short, treat WordPress tags like popular social hashtags.
How many tags to use: Using tags is not limited by WordPress but try to summarize the post in 3 tags. This is a good number for a website with about 500 posts. The number would definitely increase if you have a larger number of posts.
Note: Do not repeat category names for tags to avoid confusion.