I won't mention the examples that people gave. Basically, it's something that PC came up with to make people feel...less paranoid about their surroundings. However, even if you use the "right" terms, people will still get mad at you.
Me: Hey, you know that James kid? I heard that he's gay.
Friend: Hey, he's not gay. He's different.
Me: Oh, yeah, that's nice. Good job, dumbass...hey, look at that fat kid.
Friend: He's not fat, he's horizontally challenged.
Me: Dude, shut up. It's not gonna make him feel any better by calling him that. If you're that stupid to use "political correctness," then I'm sorry, but you need to go kill yourself.