How much time to allow to drive from Toledo to Madrid Airport for 11:30am flight

That's way too optimistic for me. ViaMichelin estimates the driving time at 1 hr. 12 min., but that's just from "Toledo" to Terminal 4, not specific enough. And that doesn't allow for any sort of traffic issues. You might have a delay at the rental-car counter, too. And I don't know how long it will take you to get from the rental-car drop-off location to the check-in line.

I've flown into Barajas but not out of that airport. Last summer I stood in the check-in line at the Barcelona airport for nearly an hour, so I think you need the full 3 hours if this is a flight back to the US or Canada.

I'm extremely risk-averse when it comes to making transatlantic flights. If my departure was 11:30 AM, there's no way I'd be staying anywhere other than Madrid the night before, and I wouldn't want to have to fool with a rental-car return, either. But others will probably say I'm being too conservative!

Susan,

I'd probably return the car prior to going to Toledo especially since you won't need the car there.

I'd also suggest spending the night before your departure in Madrid or at a hotel near the airport.

You should be at the airport around 3 hours prior to your flight's departure.

Have a wonderful trip!

This is a tricky one.
I dare say it can be done (but I'd leave by 6am).
However, there is a chance that something may go wrong or hold you up.
Then there is the stress involved.
Up to you ... (but I wouldn't)

I'd leave the night before, even if it's kind of late that evening to maximize time in Toledo. I'd leave at 10PM, return the car and stay in an airport hotel.

If that won't work I'd at least leave before 7AM. I am not sure how morning traffic is, and if you have to go through the check in line it can take longer than you think.
3 hours is the "rule of thumb" for international flights so you want to be done returning the car and in the check in line by 8:30. Returning the car is often fast but I have had long waits or difficulty finding the drop off. Aim to be at drop off by 7:30. Leave Toledo before 6:30. Meaning in the car, driving - it can take a long time to walk to parking in Toledo depending on where specifically.

I'd rather stay in Madrid that night than get up at 5:30 to leave but that's just me.

The airport should be no more than an hour drive from Toledo, unless of course there are unforeseen events. Returning a car at the airport can be confusing, (if you rent through Avis at least). If not paying attention you'll end up in a regular parking lot not the rental car return. Just before entering the parking lot, look to the right and there's a small sign saying rental car return. If nobody else is returning their car at the same time as you, the actual return process is fairly quick. If you're 6th in line, you may be there a while. Personally, I'd play it safe and allow yourself more time. On a good note, the rental car return is right in front of the terminal.

Wow! Thanks for all the suggestions! One good thing is that we are driving/flying back on Sunday morning so hopefully that will mean less traffic. I will definitely start out a lot earlier though!