"Z" can have different meanings. But I would treat this expression "śmiać się z kogoś" (to laugh at someone) as a set expression. When used with Genitive like in this sentence it usually means "from" (something). It would mean "with" (accompanying) if it were used with Instrumental - "Dlaczego ona się z tobą śmieje?" It would mean: "Why is she laughing with you?". But it would be better to say: "Dlaczego się śmiejecie?" (Why are you laughing?)
I'm not so sure about this translation.
"Laughing about you" makes it sound like she is laughing at the expense of someone but not necessarily when they are around. "Laughing at you" would mean that she is laughing directly at them in their presence.
Also, "laughing about" someone sounds more like there is something abouth their core being that is humorous. This, opposed to "laughing at" someone who has done or said something funny.