We've been doing some 4" white tiles every year at the pottery painting place, with the idea that we'll use them the next time we remodel a bathroom; it's fun to have them through the years. We try to stay in the same general color family.
I made my husband a photobook with our baby's birth and first 2 months in it, as his gift from the baby. I would like to make one from the older girls, too.
If mugs don't work, then perhaps a painted plate from the kids, or Christmas ornaments, or a frame they paint? I'd prefer that to something like a t-shirt, just because it'll last longer.
Finally, stepping stones are easy and great and lots of fun! We found directions online, used the plastic saucers that go under house plants, and the kids put their handprints, shells, sea glass, etc in a pretty pattern, and we drew in their name and the date. Great if you have a place for them; useful and can last forever (it's nice to get something that will actually get used, IMHO).