I'm very up front. I just say flat out that we can't afford it and if we have something to contribute we will. Because my neice & nephews are so young, we kinda don't make a big deal out of christmas presents... I think we spend $10-15 on them and if something was able to be made as a gift, even better! My sister last year tye dyed some clothes for my kids and they loved them.

I think your IL's have very unreal expectations sadly.