As I explained if your uploading an image larger than your server's PHP settings allow then it drops the file and does not even get to the software to even process. Your error has to do with the server not software.
You can do the tweak I linked to raise your PHP memory without altering the server php settings as thats allowed through an ini_set line. I brought this up because you said something about a timeout.
You do not set PHP max file upload in the software if thats what you are getting at with the 256mb thing. This is a server setting in your php.ini file. if you view your PHPINFO under admin look down and fine the max upload filesize bet your going to see it is 2mb. The setting in admin suppose to be whatever your PHPINFO setting is. raising that is not going to override server permissions. Your server settings determine what is allowed. Therefore if it is 2mb you will not be allowed to upload any file over 2mb.
You would have to edit your servers php settings to change this.