Short between GND of Arduino and AC powered circuit
Don't use mains power for anything!

Simply use any common-as-dirt, UL-listed DC power supply. They are made by the billions at trivial prices. 5V supplies are particularly abundant, being sold at every convenience store and gas station.   This is not a wheel you need to reinvent. Certainly not worth dying for!  Let alone smoking a laptop. 

Where you went off the rails is by taking 120V or 230V mains (which you should be mortally afraid of), and homebrewing a power supply from that.  You go "Well, it's only 1 volt!" Right, you're testing DC.  Flip the meter to AC setting. I bet you see a much larger number.  

DC and AC can coexist in the same place, the DC is a bias upon the AC.  Normal 120VAC has 170V peaks.  If you had a sinewave with -165V to +175V peaks, that's still 120VAC, but has a 5 volt DC bias.  It will read 5V on DC.