Instagram has been updated, reaching version 3.5 and now includes the new feature of photo tagging. You've been able to use hashtags up until now, but tagging your friends in your photos is a great new addition.
You can take your picture, drop it, apply whichever filter you like best, then tap the tag button to select one or more friends in your photo. You can add any of your friends, as well as other accounts you follow such as a restaurant or business. The person who took the photo is the only one who can tag others, which will help with spam, thankfully.
If you're tagged in one of your friends' photos, it will turn up in your profile as "Photos of You", where you, or anyone else, can see them in one single spot.