Destroying Damaged American Flag
According to the United States Code,Title 4 Chapter 1, Section 8, "The flag, when it is in such condition that it is no longer a fitting emblem for display, should be destroyed in a dignified way, preferably by burning."
If you feel uncomfortable disposing of your flag in this manner, contacting a local veteran's group in your area is suggested. These groups hold ceremonies to dispose of flags, and the group's members are quite capable of disposing of the flag in a dignified, lawful manner.