How about making an entire outfit out of an old t-shirt? Of course the outfit will be toddler sized, but it's still qualifies as one of the three R's! (Reduce, Recycle, Reuse). Go to Lil Blue Boo to learn more.
Make a toddler's dress from dish towels?! The directions at Trey & Lucy make it sound easy. Maybe I'll look for some Patriotic towels in the Target dollar bin as July 4th approaches.