When I first started researching genres, the difference between paranormal and fantasy confused me to no end. To me, they were pretty much the same thing. So, I looked around the Interwebs, compared as many different sources as I could, and interviewed all my writer buddies. Here is what I came up with:
So, how do you tell if a story is Paranormal or Urban Fantasy? Well, I took a little poll of the writers I know and most of them seem to agree the difference is MAGIC. If the story contains magical elements, it’s an Urban Fantasy. If it doesn’t, it’s Paranormal.
Going by this, stories like Twilight and Vampire Academy would be Paranormal. There are vampires in both and in Twilight especially, some of the vampires have special talents (Edward reading minds, Alice seeing the future) but these talents aren’t really ‘magical.’ Now, the opposite could be argued if you view those elements as magical – in that case, this book could be and has been classified as UF…and this is exactly why this genre is a pain for me :D. But for me, those elements are not magical and I would therefore classify Twilight as a paranormal.
Stories like Harry Potter, Wicked Lovely, Charlaine Harris's Sookie Stackhouse books, and P.C. Cast's House of Night series (Marked, Hunted, etc) would be Urban Fantasy. Because in these books, there are magical elements with the fairy glamour and witches and wizards wielding magic and in the House of Night series, the vampires do some mystical magical stuff with the five elements and their ‘talents.’ I place the Sookie Stackhouse books in this category (I used to call them paranormal) because in the later books, fairy magic becomes a huge part of the storylines.
Fairies, dragons, witches wielding magic, for me, mean urban fantasy. Take away the magic and fairies and witches are normal people (or don't exist at all). Vampires, werewolves, ghosts, physics...there is no magic to take away. Take away their otherworldly elements and they are creatures who are, or were, human - with a little extra thrown in that is not of magical origin. Now if you are a werewolf because a wicked sorcerer cursed you, I'd place that in the urban fantasy category. If you were born that way with no magical intervention, you are paranormal.
Time travel is a bit of a different kettle of fish. Most people I've spoken with view time travel as a science fiction element. So I suppose if I were forced to choose between paranormal or urban fantasy for a time travel story it would depend on how the time travel occurs. If the characters can travel through time because of a spell or fairy magic, I'd call it urban fantasy. If the characters can time travel because of some innate, inborn ability (for example, if Edward in Twilight can time travel instead of reading minds) I'd probably call it paranormal. If the characters figure out how to bend the laws of physics and travel around, I'd call it sci fi.
Keep in mind, these definitions and tests are what I do and how I differentiate. As with many things in this business, there are few hard and fast rules. I’m sure there are others who do it differently and would disagree with my classifications, but for me, this is what works :)
(Here's a good post from Operation Awesome contributor Angelica Jackson on her take)