You should tried to place a resistor on the emitter of your transistor and your output will be between the emitter and the resistor. I will tried to have a common ground between the micro controller and the christmas light circuits. I am still a students but give it a shot...hope it will help.

A good circuit would be a transistor that drives a relay. Then the relay contacts can be placed in series with the Christmas lights. Connect the output of the microcontroller with the base of the transistor through a 1-5k ohm resistor, ground the emmiter and place the relay coil between the colector of the transistor and the 5 volts power supply. Don't forget to place a diode (1N4001 or 1N4148) across the relay coil to protect the transistor from back EMF.
GOod luck !

The relay suggested is a good idea. Remember you are controlling AC with the output of your transistor. To get around the idea of a common ground, use an opto isolator or simply power the mechanical relay with the microcontroller output. Either of these methods will eliminate the need for a common ground and might save your microcontoller, too!

The simple method is to use a SSR. These can come in a 5V input to switch on/off an AC signal. Check in the DigiKey catalog or Newark's catalog for the part number and costing.