I once got this objection from a young woman who I knew was promiscuous and partied a lot (including drinking alcohol, which Islamic doctrine says is taboo). My response was, "I am criticizing Islamic teachings. You do not follow these teachings, so what are you objecting to?" It effectively stopped her in her tracks. I think she was afraid someone in her family would find out, and didn't want me saying any more.
But I generally avoid telling Muslims about the doctrines of Islam. If they don't know, I'd rather they stayed ignorant, unless I feel I could actually turn them into apostates. And if they already know the doctrines, I am unlikely to dislodge their belief, so it's a waste of time.
But occasionally you will accidentally have to engage Muslims. For the most part, you can simply say, "I'm glad you and your family and community are not terrorists." But if you have an audience — if this is a public conversation, or if it's a comment on Facebook or a blog or YouTube, and others are waiting to see how you will respond — here's a way you could answer the objection:
Terrorism is a tactic. The goal is to bring "the light of Islam" to the world. That is one of a Muslim's primary religious obligations. It is known as jihad. The purpose of jihad is not to blow things up. The purpose is to bring Islamic law to the world; to ultimately create the conditions wherein all people on earth are under the legal rule of Sharia law.
One way to accomplish this goal is with intimidation. If you can frighten people with your willingness to do violence if they don't comply, if you have sufficient power to inflict the violence, this tactic can be very effective. In places like India, where there is a sizable minority of Muslims, the tactic is powerful.
But in a place like the United States, where the Muslim population is only one percent, it is much less effective. So other tactics are used here. The Muslim Brotherhood — the largest Muslim organization in the world — has set up lots of seemingly mainstream and moderate organizations, working legally within the United States and other Western democracies, to accomplish the goal of getting non-Muslims to follow the legal rules of Islamic law. For example, it is against Sharia law to criticize Islam or Mohammad, and these organizations are working hard to make Americans follow this rule. So organizations like CAIR will sue people, or get the media involved in conflicts so someone gets fired, and many other legal means they can use to suppress the free expressions guaranteed under our constitution but illegal under Sharia, and they often succeed. One example of their success was the riots over the Mohammad cartoons. One one newspaper in the United States reprinted the cartoons. Every other newspaper, in essence, followed Sharia law.
Groups like CAIR and ISNA are funded, in part, by donations from Muslims. And many other politically-oriented Muslim projects are funded by mosques around the country. So if the Muslim who has a family and community who are not terrorists are paying their zakat, they may well be funding this ongoing non-violent jihad without knowing it. If they are a member of any religious organizations like the Muslim Students Association, ISNA, or whatever, they may be advancing the agenda without ever doing anything that might be considered "terrorism."
My general goal when answering an objection is using the objection as an opportunity to get more good information into the other person's head. Not to argue. To educate.
Now in this case, you are answering a Muslim, but the purpose is not to educate the Muslim. Try to educate anyone who is listening. I don't recommend arguing with Muslims at any time. You have more important things to do. Focus your attention on educating your fellow non-Muslims. But if the situation comes up, and if there is a non-Muslim audience, use your conversation with the Muslim to help educate your fellow non-Muslims. Get some important, basic facts into their heads.