Sensing AC signal from 24VAC thermostat transformer

[perky]

@perky,
Not sure I'm fully following, the "GND" and "16VACSWITCHED" are the actual AC signals, the "GND" one functions as a ground for the circuit, the other AC signal is wired through a relay.

Ah, OK. In which case the local ground reference is one of the AC arms which is fine (assuming this local ground can float). If you were using some other local ground like a power supply though it might be an issue.

I'd still put the protection diode across the opto-isolator LED though if using 24V, it's going to break down when reverse biased (there'll be potentially 34 volts across it).
Mark.